A sales manager has projected that an increase in the monthly advertising budget to $10,000 will increase monthly sales from 10,000 units to 12,000 units.Each unit sells for $50 with total variable costs per unit of $40.Monthly fixed expenses,including the current advertising costs of $5,000,total $20,000.Given the above data,what will be the expected impact on net income?

Question

Quizplus · Accepted Answer

Before the increase in advertising budget:
Total revenue = 10,000 x $50 = $500,000
Total variable costs = 10,000 x $40 = $400,000
Contribution margin = $500,000 - $400,000 = $100,000
Total fixed expenses = $20,000 (including advertising costs of $5,000)
Net income = $100,000 - $20,000 = $80,000

After the increase in advertising budget:
Total revenue = 12,000 x $50 = $600,000
Total variable costs = 12,000 x $40 = $480,000
Contribution margin = $600,000 - $480,000 = $120,000
Total fixed expenses = $20,000 + $5,000 = $25,000
Net income = $120,000 - $25,000 = $95,000

The expected impact on net income is an increase of $15,000 (from $80,000 to $95,000) due to the increased sales from the increased advertising budget. Therefore, the correct answer is C.

A Sales Manager Has Projected That an Increase in the Monthly