Infinity Designs, an interior design company, has experienced a drop in business
ID: 2628567 • Letter: I
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) $15,500 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) $2,200 Depreciation of company cars 9,000 Required: Calculate the impact of the exhibit on company profit.
Explanation / Answer
In the previous year, the variable costs were design supplies of 15,500 and travel expenses of 2,200
So total variable costs = 15,500 + 2,200 = 17,700
Contribution = sales - variable costs = 201,000 - 17,700 = 183,300
Contribution margin % = contribution / sales = 183,300 / 201,000 = 91.194%
So, this year, increase in sales of 36,000 will result in increase in contribution of 36,000 * 91.194% = 32,829.85
However there is also an exhibition cost of 12,000
So net impact on profits next year = increase in contribution - exhibition cost = 32,829.85 - 12,000 = 20,829.85
Answer: 20,829.85 (or rounded off to 20,830)
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