Question

Last year, Emily Sanford had a booth at the three-day Indianapolis Craft Expo where she sold a variety of silver jewelry hand-crafted in India. Her before-tax profit was as follows:
Sales............. $19,600
Less:
Cost of jewelry sold.... 10,780
Gross margin.......... 8,820
Less other expenses:
Registration fee...... 1,800
Booth rental (6% sales) ..... 1,176
Salary of Mindy Orwell... 450
Before tax profit......... $ 5,394
Mindy Orwell is a friend who takes care of the booth for approximately 5 hours from 9 A.M. until 2 P.M. Emily takes over from 2 P.M. until closing at 9 P.M. Emily has added several new designs to her collection and anticipates that in the coming year, her sales will increase by 20 percent, to $23,520. In light of this, she has forecasted before-tax profit as follows:
Before-tax profit in prior year....... $ 5,394 a
Sales in prior year............. 19,600 b
Before-tax profit per dollar of sales....... 0.2752 a ÷ b
Forecasted sales............. $23,520
Profit per dollar of sales.......... 0.2752
Forecasted before-tax profit........ $ 6,473

Required
a. What is the fundamental assumption that Emily is making, and why is it obviously wrong?
b. Prepare a more appropriate forecast of before-tax profit related to the Indianapolis Craft Expo.



$1.99
Sales1
Views149
Comments0
  • CreatedSeptember 18, 2013
  • Files Included
Post your question
5000