O'Neill, Incorporated's segmented income statement for the most recent month is given below. For each of the following questions, refer back to the above original data. The marketing department believes that a promotional campaign at Store A costing $6, 000 will increase sales by $15, 000.If its plan is adopted, overall company net operating income should:
A)decrease by $1, 800
B)decrease by $10, 200
C)increase by $10, 200
D)increase by $1, 800

Question

O'Neill, Incorporated's segmented income statement for the most recent month is given below.  For each of the following questions, refer back to the above original data. The marketing department believes that a promotional campaign at Store A costing $6, 000 will increase sales by $15, 000.If its plan is adopted, overall company net operating income should:
A)decrease by $1, 800 
B)decrease by $10, 200 
C)increase by $10, 200 
D)increase by $1, 800

Quizplus · Accepted Answer

Store A CM ratio = Contribution margin ÷ Sales = $28, 000 ÷ $100, 000 = 0.28
Change in contribution margin = CM ratio × Change in sales = 0.28 × $15, 000 = $4, 200
Change in net operating income = Change in contribution margin - Cost of promotional campaign = $4, 200 - $6, 000 = -$1, 800

O'Neill, Incorporated's Segmented Income Statement for the Most Recent Month