John Owen Owns a Drugstore That Is Experiencing Significant Growth

question 96

Multiple Choice

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

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Definitions:

Variable Manufacturing Cost

Costs that fluctuate with the level of production output, such as raw materials and direct labor.

Fixed Manufacturing Cost

Overheads that do not change with the level of manufacturing output, including salaries of permanent staff and rent.

Annual Impact

The effect or influence that something has over the course of a year, often used in the context of financial, environmental, or social effects.

Net Operating Income

The total profit of a business after subtracting operating expenses but before deducting taxes and interest.