Arabelle is considering expanding the floor area of her high-fashion import clothing store, The French Prints of Arabelle, by increasing her leased space in the upscale Cherry Creek Mall from 2,000 square feet to 3,000 square feet. The Cherry Creek Mall boasts one of the country's highest ratios of sales values per square foot. Rents (including utilities, security, and similar costs) are $110 per square foot per year. Salary increases related to French Prints' expansion are shown in the following table, along with projections of sales per square foot. The purchase purchase cost of goods sold averages 70 percent of the sales price. Sales are seasonal, with an important peak during the year-end holiday season.
Year Quarter Sales (per sq ft) Incremental Salaries
1 1 $90 $12,000
2 60 8,000
3 110 12,000
4 240 24,000
2 1 99 12,000
2 66 8,000
3 121 12,000
4 264 24,000
a. If Arabelle expands French Prints at the end of year 0, what will be her total pretax loss after 2 years?
b. Project the total pretax income for year 3, assuming the sales pattern continues (10 percent annually compounded increase).