Question

Jennifer started a restaurant in Chicago. She rented a building, bought equipment, and hired two employees to work full time at a fixed monthly salary. Jennifer’s utilities and other operating charges remain constant during each month. During the past two years, her business "Jenny Girl" has grown with average sales increasing 1% a month. Jenny is happy, however, she does not understand why her sales can grow by one percent a month while her profits are increasing at an even faster pace. Jennifer is afraid that she will have increased sales but decreased profits. Why is Jenny Girls profits increased at a faster rate than sales? Explain

Answer 1

Jenny Girl's sales are increasing at 1% per month but the profits are increasing at an even faster pace. Reason for that is there is an increase in the Jenny Girl's Sales but no corresponding increase in the Expenses of Jenny Girl. Because it is given that the teo employees are hired at a FIXED salary. Also the operating charges remain constant each month. For example, suppose the sales in the first month was of $1000 and salary and other operating charges were $600. In this case the profits was $400 i.e. 40% (400/1000). Now if sales increase by 1 % and the expenses doesn't change, then New sales = $1010 (1000*1.01) New operating expenses = $6000 (because they are constant every month. New profit = $410 i.e. 40.59% (410/1010). In this case, Sales increased by 1% but the profits incrininc by 1.475% (.59/40) i.e. more than the percentage increase in Sales. So expenses per month remaining constant even though there is increase in Sales is the reason why hwr profits are increasing at an even faster pace.