Question

In: Accounting

Page Interiors, an interior design company, has experienced a drop in business due to an increase...

Page Interiors, an interior design company, has experienced a drop in business due to an increase in interest rates and a corresponding slowdown in remodeling projects. To stimulate business, the company is considering exhibiting at the Middleton Home and Garden Expo. The exhibit will cost the company $14,910 for space. At the show, Page Interiors will present a slide show on a laptop, pass out brochures that were printed previously (the company printed more than needed), and show its portfolio of previous jobs.

The company estimates that revenue will increase by $40,330 over the next year as a result of the exhibit. For the previous year, profit was as follows:

Revenue $212,366
Less:
Design supplies $18,080
Salary of Samantha Spade (owner) 81,427
Salary of Kim Bridesdale (full-time employee) 55,659
Rent 19,035
Utilities 6,870
Depreciation of office equipment 3,780
Printing of advertising materials 799
Advertising in Middleton Journal 2,780
Travel expenses other than depreciation of autos 2,950
Depreciation of company cars 10,630 202,010
Net income $10,356


Assume that design supplies and travel other than depreciation are variable costs.

Calculate the impact of the exhibit on company profit. (Round intermediate calculations to 4 decimal places, e.g. 0.3215 and final answer to 0 decimal places, e.g. 125.)

Company profit will select an option                                                          increasedecrease by enter a dollar amount


Should the company exhibit at the home show?

The company select an option                                                          shouldshould not exhibit at the home show.

Solutions

Expert Solution

Part 1 - Impact of the exhibit on company profit

$$

Incremental Revenue as a result of exhibit

$40,330

Increase in Contribution Margin
($40,330 * 90.0973%)

(Refer Note 1 – for Contribution Margin Ratio)

$36,336

Less: Space Cost for Exhibit

($14,910)

Increase in Company's Profit as a result of Exhibit

$21,426

Impact of the exhibit on company profit = Profit will increase by $21,426

Note 1 -

First of all we need to calculate the contribution margin ratio by using previous year data given in the question.

$$

Percentage

Revenue

$212,366

100%

Variable Costs

Design Supplies

$18,080

Travel expenses other than depreciation of autos

$2,950

Total Variable Costs

$21,030

9.90%

Contribution Margin (Revenue - Variable Costs)

$191,336

90.10%

Fixed Expenses:

Salary of Samantha Spade (owner)

$81,427

Salary of Kim Bridesdale (full-time employee)

$55,659

Rent

$19,035

Utilities

$6,870

Depreciation of office equipment

$3,780

Printing of advertising materials

$799

Advertising in Middleton Journal

$2,780

Depreciation of company cars

$10,630

Total Fixed Expenses

$180,980

Operating Income

$10,356

Note – Fixed Expenses are period cost and irrelevant for decision making whether company should exhibit or not. Fixed Expenses are the expenses which have already been incurred and will not incur in future. Hence treated as SUNK COSt.

Part 2 –

Yes, the company should exhibit as the home show.

Hope the above calculations, working and explanations are clear to you and help you to understand the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you


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