Star Corporation management has budgeted the following amounts for its next fiscal year: If Star Corporation spends an additional $20,000 on advertising, sales volume should increase by 3,000 units. What effect will this have on operating income?

Question

Star Corporation management has budgeted the following amounts for its next fiscal year:  If Star Corporation spends an additional $20,000 on advertising, sales volume should increase by 3,000 units. What effect will this have on operating income?

Quizplus · Accepted Answer

If Star Corporation spends an additional $20,000 on advertising, sales volume would increase by 3,000 units. This means that the company's revenue would increase by:
$50 per unit x 3,000 units = $150,000

However, the company would also be incurring an additional expense of $20,000 on advertising. Therefore, the net effect on operating income would be an increase of:
$150,000 - $20,000 - $75,000 = $55,000

Therefore, the correct choice is B, an increase of $55,000.

Star Corporation Management Has Budgeted the Following Amounts for Its