Titanic Roofing Company has estimated the following amounts for its next fiscal year: $$\begin{array} { | l | r | }
\hline \text { Total fixed costs } & \$ 840,000 \
\hline \text { Sale price per unit } & 80 \
\hline \text { Variable cost per unit } & 30 \
\hline
\end{array}$$ If the company spends an additional $35,000 on advertising, sales volume would increase by 2500 units. Before the change, the company's sales level exceeds the breakeven point. What effect will this decision have on the operating income of Titanic?

Question

Titanic Roofing Company has estimated the following amounts for its next fiscal year: $$\begin{array} { | l | r | } 
\hline \text { Total fixed costs } & \$ 840,000 \
\hline \text { Sale price per unit } & 80 \
\hline \text { Variable cost per unit } & 30 \
\hline
\end{array}$$ If the company spends an additional $35,000 on advertising, sales volume would increase by 2500 units. Before the change, the company's sales level exceeds the breakeven point. What effect will this decision have on the operating income of Titanic?

Quizplus · Accepted Answer

The additional advertising will increase sales by 2500 units. The contribution margin per unit is $50 ($80 - $30). Therefore, the additional sales will generate an additional $125,000 in contribution margin ($50 x 2500). The additional advertising expense of $35,000 will reduce the operating income by $35,000. Therefore, the net effect of the decision will be to increase the operating income by $90,000 ($125,000 - $35,000).

Titanic Roofing Company Has Estimated the Following Amounts for Its