est your knowledge of this topic by selecting the best answer for each of the following questions. You will use the Comfy Chair Company model for these questions. (Important:Do notclick the Reset button in the model before entering new data, since the correct answers assume that you have correctly completed the quiz preparation steps and the model is in that configuration.) Start this quiz after completing step 2 in the Quiz Preparation box in the Commentary. Double check that you show 20,000 units, insurance costs of $150,000, and a profit of $279,700 before continuing. You may find it helpful to print out each version of the model as you go along to keep track of your answers, since each question builds on the previous one. When you click the Submit button, you will see your score and the results will go to your instructor.
After each question, you will receive feedback and the correct answers. It is important to update your financial model before moving on to the next question. Quiz 1.3 has three questions, so be sure to submit all three of your answers. If you leave the quiz and return before submitting the last answer, the quiz will resume with the next question.
1. The sales department tells management that they can increase revenue by 20 percent by increasing sales 20 percent, but the production department says that to achieve that number of units, they will have to buy a new piece of equipment that will add $200,000 to the appropriate category. What happens when we enter those changes into our model? (Enter a new number in Enter Units that reflects a 20 percent increase in chairs sold. Increase Manufacturing Machinery to allow for the new purchase.) Clearly, a 20 percent increase in sales will increase revenue 20 percent, but what happens to profits?
d. Profits do not change.
Management believes they can increase the price per chair by 10 percent in this new situation and improve profits by 10 percent. However, the sales department cautions that the price increase may decrease sales by 10 percent because the chairs will be higher-priced than the competition. Because the chair business uses price as one of its major competitive factors, the sales department feels that sales will be hurt. Using our model, what will happen to profits if both of their forecasts are correct?
a. Profits increase 12.5 percent.
b. Profits decrease 11.3 percent.
c. Profits increase 6.7 percent.
d. Profits increase 7.4 percent.
The chief information officer recommends that a new computer and software be purchased and installed at a cost of $100,000. This investment will decrease manpower costs by $4 per chair and shipping and handling by $2 per chair, which he says should result in an increase in profits of 10 percent. Will the purchase of the new computer and software result in increased profits, and if so, by how much?
a. Yes, by 12.6 percent.
b. No, by -9.8 percent.
c. Yes, by 22.6 percent.
d. Yes, by 7 percent.