PROBLEM 4-7. Fixed and Variable Costs, The Profit Equation Last year, Cindy Mathers had a booth at the three-day Bellevue Craft Fair where she sold a variety of silver jewelry handcrafted in India. Her before-tax profit was as follows:

Sales Cost of jewelry sold Gross margin Registration fee Booth rental (5% sales)

Salary of Jane Kramer Before tax profit

$15,520 9,312 6,208 1,000 776 300

$ 4,132 Jane Kramer is a friend who takes care of the booth for approximately 5 hours from 9 a.m. until 2 p.m. Cindy takes over from 2 p.m. until closing at 9 P.M.

Cindy has added several new designs to her collection and anticipates that in the coming year, her sales will increase by 20 percent to $18,624. In light of this, she has forecasted before-tax profit as follows:

Before tax profit in prior year Sales in prior year Before tax profit per dollar of sales Forecasted sales Profit per dollar of sales Forecasted before-tax profit

$ 4,132 15,520

.26624

$18,624

.26624

$ 4,958 Required

a. What is the fundamental assumption that Cindy is making and why is it obviously wrong.

b. Prepare a more appropriate forecast of before-tax profit related to the Bellevue Craft Fair.