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)				$17,000
		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)				$3,000
		Depreciation of company cars				9,000
Required:
Calculate the impact of the exhibit on company profit.

Round to two decimal places.

Answer 1

Fixed costs which are unavoidable will remains same as last year.i.e. salary, depreciation, Rent, advertising, printing are fixed costs.

here the relevant costs are variable expenses.variable expenses will increase with increase in revenue and exhibition cost will be an additional cost.

step 1: find variable costs

=design supplies + travel expense other than depreciation on autos

=$17000+$3000

=$20,000

step 2: find contribution margin

= sales- variable costs

=$201,000-$20,000

=$181,000

step 3 : contribution margin ratio

= contribution margin/ sales

=$181000/201000

=90.05%

step 4 : contribution margin on additional revenue

$36,000*90.05%

=$32,418

step 5 :increase in income due to additional sales

incremental revenue- incremental cost

additional contribution margin- additional space rent

=$32,418-$12,000

=20,418$ increase in net income