Question

Infinity Designs, 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 Home and Garden Expo. The exhibit will cost the company $12,000 for space. At the show, Infinity Designs will present a slide show on a PC, pass out brochures that are printed previously, (the company printed more than needed), and show its portfolio of previous
jobs.
The company estimates that revenue will increase by $36,000 over the next year as a result of the exhibit. For the previous year, profit was as follows:

		Revenue					$201,000
		Less:
		Design supplies (variable cost)				$15,000
		Salary of Samantha Spade (owner)				80,000
		Salary of Kim Bridesdale (full time employee)				55,000
		Rent				18,000
		Utilities				6,000
		Depreciation of office equipment				3,600
		Printing of advertising materials				700
		Advertising in Middleton Journal				2,500
		Travel expenses other than depreciation of autos (variable cost)				$2,600
		Depreciation of company cars				9,000
Required:
Calculate the impact of the exhibit on company profit.

Round to two decimal places.

Your Answer:

Answer 1

All the financials in this solution are in $.

Please examine the given income statement. There are two costs that are variable in nature.

• Design supplies = 15,000  
• Travel expenses other than depreciation of autos = 2,600  

Total variable cost = 15,000 + 2,600 = 17,600

Contribution = Revenues - Variable costs =  201,000 - 17,600 =  183,400

Contribution Margin, CM = Contribution / Revenues = 183,400 / 201,000 = 91.24%

Exhibit will have the following impact on the profits:

• It will lead to an incremental revenue generation of 36,000
• It will maintain the contribution margin same as before
• It will incur an incremental fixed cost of 12,000 for space.

Hence, impact of the exhibit on the profits = Incremental revenue x CM - Incremental fixed costs = 36,000 x 91.24% - 12,000 =  20,847.76