George P.Burdell owns a hot tub store that is experiencing significant growth.Burdell is trying to decide whether to expand the store's 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 ($000)sales per quarter,for next year (year 2)are: Demand in year 3 and beyond is expected to exceed $850,000 per quarter.Burdell 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?

Question

George P.Burdell owns a hot tub store that is experiencing significant growth.Burdell is trying to decide whether to expand the store's 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 ($000)sales per quarter,for next year (year 2)are:  Demand in year 3 and beyond is expected to exceed $850,000 per quarter.Burdell 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?

Quizplus · Accepted Answer

To determine the increase in before-tax profits in year 2, we need to calculate the additional sales that would result from expanding to the $850,000 level. The forecasted demand for year 2 is $800,000, which means an additional $50,000 in sales from expanding. The before-tax profit from this additional sales is 20 percent, so the increase in before-tax profits in year 2 would be $10,000 (i.e. 20% of $50,000). Therefore, the total before-tax profits in year 2 would be $150,000 ($140,000 from current sales plus $10,000 from expansion). The increase in before-tax profits from the expansion would be $36,000 (i.e. the difference between the total before-tax profits with and without expansion, which is $150,000 - $114,000). Thus, the correct answer is D, more than $36,000.

George PBurdell Owns a Hot Tub Store That Is Experiencing Significant