In: Accounting
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. |
Part 1 - Impact of the exhibit on company profit
$$ |
|
Incremental Revenue as a result of exhibit |
$40,330 |
Increase in Contribution
Margin (Refer Note 1 – for Contribution Margin Ratio) |
$36,336 |
Less: Space Cost for Exhibit |
($14,910) |
Increase in Company's Profit as a result of Exhibit |
$21,426 |
Impact of the exhibit on company profit = Profit will increase by $21,426
Note 1 -
First of all we need to calculate the contribution margin ratio by using previous year data given in the question.
$$ |
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