Question

You have built your career on your ability to control the variable expenses within your picture framing company. Now you are considering purchasing another picture framing business. You believe that most picture framing businesses do a poor job of managing COGS – which represents a big opportunity for you to increase profits quickly. You have identified four different businesses that make $100,000 per year profit. Their income statements are as follows:

Adam’s FramesBob’s FramesCarl’s FramesDee’s FramesAnnual revenue$139,000$133,000$126,000$141,000ExpensesFraming material:

$5,000

Glass, wire: $2,000

Utilities: $15,000

Marketing: $15,000

Insurance: $2,000Framing material:

$7,000

Glass, wire: $5,000

Utilities: $10,000

Marketing: $10,000

Insurance: $1,000Framing material:

$5,000

Glass, wire: $5,000

Utilities: $5,000

Marketing: $10,000

Insurance: $1,000Framing material:

$7,000

Glass, wire: $7,000

Utilities: $10,000

Marketing: $15,000

Insurance: $2,000Profit before taxes$100,000$100,000$100,000$100,000
Since the four businesses have the same profit before taxes, you decide to choose the business with the highest variable costs. Which business do you choose?

a. Carl’s Framesb. Dee’s Framesc. Bob’s Framesd. Adam’s Frame

Answer 1

	Adam’s	FramesBob’s	FramesCarl’s	FramesDee’s
Revenue	$       1,39,000	$       1,33,000	$       1,26,000	$       1,41,000
Variable costs :
Framing material	$             5,000	$             7,000	$             5,000	$             7,000
Glass, wire	$             2,000	$             5,000	$             5,000	$             7,000
Total Variable cost (framing material + Glass, wire)	$             7,000	$           12,000	$           10,000	$           14,000
Fixed Costs :
Utilities	$           15,000	$           10,000	$             5,000	$           10,000
Marketing	$           15,000	$           10,000	$           10,000	$           15,000
Insurance	$             2,000	$             1,000	$             1,000	$             2,000
Total Fixed cost	$           32,000	$           21,000	$           16,000	$           27,000
Profit before taxes	$       1,00,000	$       1,00,000	$       1,00,000	$       1,00,000
As the FramesDee's Variable cost is highest amongst all four companies we will choose FramesDee's
Note : As the data in question is not arranged properly I have assumed the given data is in following sequence :Adam’s, FramesBob’s, FramesCarl’s, FramesDee’s