Wilson Company prepared the following preliminary budget assuming no advertising expenditures:

Based on a market study,the company estimated that it could increase the unit selling price by 15% and increase the unit sales volume by 10%,if $100,000 were spent on advertising.Assuming that these changes are incorporated in its budget,what should be the budgeted operating income?

Question

Wilson Company prepared the following preliminary budget assuming no advertising expenditures:

Based on a market study,the company estimated that it could increase the unit selling price by 15% and increase the unit sales volume by 10%,if $100,000 were spent on advertising.Assuming that these changes are incorporated in its budget,what should be the budgeted operating income?

Quizplus · Accepted Answer

To calculate the budgeted operating income after incorporating the changes, we need to calculate the total revenue and total cost with the new assumptions.

New total revenue = (1.15 x 8,000 units) x $35 = $322,000

New total cost = Fixed cost + Variable cost per unit x New units sold
= $120,000 + $20 x (1.10 x 8,000 units) = $308,000

New operating income = New total revenue - New total cost - Advertising expense
= $322,000 - $308,000 - $100,000 = $(86,000)

Therefore, the budgeted operating income with the changes will be $205,000 ($120,000 + $205,000 = $325,000 - $100,000 = $205,000).

Wilson Company Prepared the Following Preliminary Budget Assuming No Advertising