Hammer Company expects the following results for the next accounting period: $\begin{array}{lr}
\text { Sales } & \$ 240,000 \
\text { Variable costs } & \$ 135,000 \
\text { Fixed costs } & \$ 40,000 \
\text { Expected production and sales in units } & 3,000
\end{array}$ The sales manager believes sales could be increased by 400 units if advertising expenditures are increased by $10,000.Suppose advertising expenditures are increased and sales increase by 400 units.What will be the effect on operating income?

Question

Quizplus · Accepted Answer

The contribution margin per unit is $(\$240,000 - \$135,000) / 3,000 = \$35$. Selling 400 more units increases contribution by $400 \times \$35 = \$14,000$. Subtracting the additional advertising cost of \$10,000, the net increase in operating income is \$4,000.

Hammer Company Expects the Following Results for the Next Accounting