Musk L.Flexor owns a hot tub store that is experiencing significant growth.Flexor is trying to decide whether to expand its capacity,which currently is at $750,000 in sales per quarter.He is thinking about expanding to the $850,000 level.The before-tax profit from additional sales is 20 percent.Sales are seasonal,with peaks in the spring and summer quarters.Forecasts of capacity requirements,expressed in sales per quarter,for next year (year 2)are:
$$\begin{array} { | c | c | }
\hline \text { Quarter } & ( \$ 000 ) \
\hline 1 & 720 \
2 & 800 \
3 & 890 \
4 & 690 \
\hline
\end{array}$$
Demand in year 3 and beyond is expected to exceed $850,000 per quarter.Flexor is considering expansion at the end of the fourth quarter of this year (year 1).How much would before-tax profits in year 2 increase because of this expansion?
A) less than $28,000
B) more than $28,000 but less than $32,000
C) more than $32,000 but less than $36,000
D) more than $36,000

Question

Musk L.Flexor owns a hot tub store that is experiencing significant growth.Flexor is trying to decide whether to expand its capacity,which currently is at $750,000 in sales per quarter.He is thinking about expanding to the $850,000 level.The before-tax profit from additional sales is 20 percent.Sales are seasonal,with peaks in the spring and summer quarters.Forecasts of capacity requirements,expressed in sales per quarter,for next year (year 2)are:
$$\begin{array} { | c | c | } 
\hline \text { Quarter } & ( \$ 000 ) \
\hline 1 & 720 \
2 & 800 \
3 & 890 \
4 & 690 \
\hline
\end{array}$$
Demand in year 3 and beyond is expected to exceed $850,000 per quarter.Flexor is considering expansion at the end of the fourth quarter of this year (year 1).How much would before-tax profits in year 2 increase because of this expansion?
A) less than $28,000
B) more than $28,000 but less than $32,000
C) more than $32,000 but less than $36,000
D) more than $36,000

Quizplus · Accepted Answer

The before-tax profit from additional sales is 20 percent. The increase in sales from $750,000 to $850,000 is $100,000. The before-tax profit from this increase in sales is $100,000 * 0.20 = $20,000. However, the expansion will also increase costs. The increase in costs is not given, but it is likely to be less than the increase in profits. Therefore, the before-tax profits in year 2 will increase by more than $20,000 but less than $32,000.

Musk LFlexor Owns a Hot Tub Store That Is Experiencing Significant