John Owen owns a drugstore that is experiencing significant growth.Owen is trying to decide whether to expand its capacity,which currently is $200,000 in sales per quarter.Sales are seasonal.Forecasts of capacity requirements,expressed in sales per quarter for the next year,follow. Owen is considering expanding capacity to the $250,000 level in sales per quarter.The before-tax profit margin from additional sales is 15 percent.How much would before-tax profits increase next year because of this expansion?
A)less than $15,000
B)more than $15,000 but less than $16,000
C)more than $16,000 but less than $17,000
D)more than $17,000

Question

John Owen owns a drugstore that is experiencing significant growth.Owen is trying to decide whether to expand its capacity,which currently is $200,000 in sales per quarter.Sales are seasonal.Forecasts of capacity requirements,expressed in sales per quarter for the next year,follow.  Owen is considering expanding capacity to the $250,000 level in sales per quarter.The before-tax profit margin from additional sales is 15 percent.How much would before-tax profits increase next year because of this expansion?
A)less than $15,000 
B)more than $15,000 but less than $16,000 
C)more than $16,000 but less than $17,000 
D)more than $17,000

Quizplus · Accepted Answer

To calculate the before-tax profit increase, we need to first find the additional sales from expanding capacity:

Additional sales = $250,000 - $200,000 = $50,000

The before-tax profit from these additional sales would be:

Profit = 15% x $50,000 = $7,500

Therefore, the before-tax profit increase for the next year would be:

$7,500 x 4 quarters = $30,000

This amount falls between the ranges given in choices C ($16,000 < $30,000 < $17,000), so the best answer is C.

John Owen Owns a Drugstore That Is Experiencing Significant Growth