Frame & Show is the name Megan Dee selected for her custom framing shop. Megan opened Frame & Show two years ago and has seen a steady improvement in her business. Megan’s customers really seem to appreciate the extensive range of moldings and mat boards Frame & Show offers as well as Megan’s artistic talents in frame design. Condensed income statements for Frame & Show’s first two years of operations follow:

Both the average frame price and Megan’s cost structure have remained the same during Frame & Show’s first two years of operations and Megan believes they are likely to remain the same in the near future.

Required:
a. Use the high-low method to estimate Frame & Show’s annual cost equation (i.e., use the data from years 1 and 2 to estimate Frame & Show’s annual fixed costs and variable cost per framing).
b. Megan has been asked to participate in the local “Thieves Market.” If she decides to participate in the market then, in addition to the variable cost of each framing, Megan will have to pay a booth fee of $2,500 to the sponsors. Megan estimates that, above and beyond her normal business, she will also be able to sell 150 framings at the market. By how much is Frame & Show’s profit expected to change if Megan participates in the ThievesMarket?

Year 1 Year 2 Number of items framed Total revenue Total costs Profit before taxes 3,0003,500 $318,000 $371,000 $310,000 $332,500 $8,000 $38,500