Bugatti, Inc. decided to institute an advertising campaign that would cost $75,000. Variable costs will remain at $15 per unit. Bugatti is currently selling 100,000 units of its product at $25 per unit. The marketing department is estimating that there will be a 10 percent increase in sales volume. With all else remaining the same, what will be the result of this decision?

Question

Quizplus · Accepted Answer

First, calculate the current operating income:
100,000 units x ($25 price - $15 variable cost) = $1,000,000 operating income

Next, calculate the expected operating income if the advertising campaign increases sales by 10%:
110,000 units x ($25 price - $15 variable cost) = $1,100,000 operating income

The total cost of the advertising campaign is $75,000. Subtract this from the expected operating income to find the new operating income:
$1,100,000 - $75,000 = $1,025,000

Comparing the new operating income to the current operating income, we see that there would be an increase of $25,000. Therefore, choice C is the best answer.