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: 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:  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

To calculate the increase in before-tax profits in year 2, we need to first find out how much capacity would be required in year 2. According to the table provided, the capacity requirement for year 2 is $800,000 per quarter (the midpoint between $750,000 and $850,000).

Next, we need to calculate the additional sales that would be generated by expanding capacity to $800,000 per quarter. The increase in sales would be $50,000 per quarter ($800,000 - $750,000).

The before-tax profit on this additional sales volume is 20%, so the increase in before-tax profits would be $10,000 per quarter ($50,000 x 20%).

Finally, we need to calculate the increase in before-tax profits for the entire year. If we assume that demand is evenly distributed across the four quarters of the year, then the increase in before-tax profits for the year would be $40,000 ($10,000 x 4 quarters).

Therefore, the correct answer is B, more than $28,000 but less than $32,000.

Musk LFlexor Owns a Hot Tub Store That Is Experiencing Significant