Handout 1-1

CLASSIC UPHOLSTERY SHOP

Tyler Smith had worked in an upholstery shop for 10 years. Last year, Tyler's wages were $20,000.

Lately, Tyler had been unhappy with the shop's owner. Convinced that he could run an upholstery shop

that did better work at a lower cost, Tyler decided to go into business for himself and opened CLASSIC

UPHOLSTERY SHOP.

To get the business going, Tyler decided to invest heavily in advertising. He spent $6,000 on advertising

aimed at consumers and another $2,000 on advertising aimed at getting work from interior decorators and

interior design stores. Tyler also purchased industrial sewing machines costing $4,000 and other tools and

equipment costing $3,000. He estimated that the sewing machines can be used for about five years before

maintenance costs will be too high and the machines will need to be replaced. The other tools and

equipment are not as durable and will have to be replaced in three years.

At the end of the first year of business, Tyler had received $80,000 in cash from customers for upholstery

work. Tyler was owed another $2,500 from customers who are not required to pay cash but are billed

every 30 days.

A review of Tyler's checkbook shows he paid the following expenses (in addition to those mentioned

previously) during the first year of business:

Upholstery fabric

$40,000

Other supplies

10,000

Wages—part-time assistant

9,500

Rent

4,800

Insurance (two-year policy)

3,200

Utilities

2,500

Miscellaneous expenses

1,700

Tyler's utility bill for the last month of the year has not arrived. He estimates that the bill will be

approximately $320.

Tyler keeps some stock of upholstery fabric in popular colors on hand for customers who do not want to

wait for special-order fabric to arrive. At the end of the year, about $14,000 of the fabric purchased during

the year was in his store stock. In addition, $2,300 in supplies had not been used.

HOW MUCH PROFIT DID TYLER MAKE IN HIS FIRST YEAR OF BUSINESS? DO YOU THINK

IT WAS A GOOD IDEA TO OPEN THE UPHOLSTERY SHOP, OR WOULD TYLER BE BETTER

OFF WITH HIS OLD JOB?