Last year, Emily Sanford had a booth at the three-day Indianapolis Craft Expo, where she sold a variety of silver jewelry handcrafted in India. Her before-tax profit was as follows:
Sales........................................................ $21,000
Less:
Cost of jewelry sold.................................... 11,550
Gross margin.............................................. 9,450
Less other expenses:
Registration fee......................................... 1,800
Booth rental (6% sales)................................. 1,260
Salary of Mindy Orwell................................. 450
Before tax profit........................................ $ 5,940
Mindy Orwell is a friend who takes care of the booth for approximately five 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 $25,200. In light of this, she has forecasted before-tax profit as follows:

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.

Transcribed Image Text:

5,940 21,000 Before-tax profit in prior year Sales in prior year Before-tax profit per dollar of sales0.2829 Forecasted sales Profit per dollar of sales Forecasted before-tax profit la $25,200 0.2829 7,129