Question

Three years ago, Vincent Chow completed his degree in business. The local economy was in a depressed state at the time, and Vincent managed to get an offer of only $31,000 per year. In addition to its relatively low pay, the job had limited advancement potential.

Since Vincent was an enterprising and ambitious young man, he declined this offer and started a business of his own. He was convinced that, because of changing lifestyles, a drive-through coffee establishment would be profitable. He was able to obtain financial backing from his parents to open such an establishment close to the industrial park area in town. Vincent named his business The Cappuccino Express and decided to sell only two types of coffee: cappuccino and decaffeinated.

As Vincent had expected, The Cappuccino Express was very well received. Within three years, he had added another site west of town. He left the day-to-day management of each site to a manager and focused his own attention on overseeing the entire enterprise. He hired an assistant to do the record-keeping and selected other chores.

1. Suppose that last year the original site had yielded total revenues 146,000, total costs of 120,000, hence a profit of 26,000. Vincent had thought this was satisfactory performance. For the coming year, Vincent expects that due to such factors as increased name recognition and demographic changes the total revenues of this site will increase by 20 percent to 175,200. What amount of profit should he expect from the site?

Answer 1

If revenues increase to $175200, with the overall expected cost remaining to be same,which is not practically possible, then Vincent can generate a total of $55200($175200-$120000)

As we know, the total cost cannot remain constant, the profit will range in between $26000 and $55200, as long as the total revenues exceeds the overall costs.

An increase in profit, does not only depend on an increase in revenue but also on the expenses.

As the information provided is limited, estimations can't be made.