|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|
|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:|
|Design supplies (variable cost)||$15,000|
|Salary of Samantha Spade (owner)||80,000|
|Salary of Kim Bridesdale (full time employee)||55,000|
|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|
|Calculate the impact of the exhibit on company profit.|
Round to two decimal places.
All the financials in this solution are in $.
Please examine the given income statement. There are two costs that are variable in nature.
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:
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
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