Biggers Company expects the following results for the next accounting period: The sales manager believes sales could be increased by 400 units if advertising expenditures were increased by $10,000.If advertising expenditures are increased and sales increase by 400 units,the effect on operating income will be a(n)

Question

Biggers Company expects the following results for the next accounting period:  The sales manager believes sales could be increased by 400 units if advertising expenditures were increased by $10,000.If advertising expenditures are increased and sales increase by 400 units,the effect on operating income will be a(n)

Quizplus · Accepted Answer

The additional advertising cost is $10,000 which is an additional fixed cost. The increase in sales will generate additional revenue given the following information:
Contribution margin per unit = Sales price per unit - Variable cost per unit
Contribution margin per unit = $30 - $15 = $15
400 additional units sold * $15 contribution margin per unit = $6,000 additional contribution margin.
The net effect on operating income will be the additional contribution margin (revenue) minus the additional fixed cost.
$6,000 - $10,000 = -$4,000 decrease in operating income.
Therefore, the correct answer is C: increase of $4,000.

Biggers Company Expects the Following Results for the Next Accounting