Directions: Test your knowledge of this topic by selecting the best answer for each of the following problems. You will use the Comfy Chair Company model for these problems. (Important: Do not click 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 problem 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 problem, you will receive feedback and the correct answers. It is important to update your financial model before moving on to the next problem. Quiz 1.3 has three problems, 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 problem.

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?

a. Profits decrease 25 percent.
b. Profits increase 41 percent.
c. Profits decrease 41 percent.
d. Profits do not change.