WSR Inc.
WSR Inc. sells a variety of drink and food products including potato chips and soft drink. The segmented income statements for these two products are as follows:
$\begin{array}{lrr}
&\underline{\text { Soft drink}}&\underline{\text { Chips}}\
\text { Sales } & \$ 800000 & \$ 900000 \
\text { Variable expenses } &\underline{ 200000} &\underline{ 315000} \
\text { Contribution margin } & 600000 & 585000 \
\text { Traceable fixed expense } & \underline{120000} & \underline{160000} \
\text { Segment margin } & \underline{\$ 480000} & \underline{\$ 425000}
\end{array}$
WSR’s management is considering a special advertising campaign that will run during a major sporting event. The advertising campaign is expected to cost $30 000 and only one product can be featured. In-house marketing studies show that the campaign could increase sales of the soft drink division by $200 000 or increase sales of the chips division by $275 000.
-What will be the overall net effect on the company's total profits if the advertising focuses on chips?

Question

Quizplus · Accepted Answer

The correct answer is A.The advertising campaign is expected to increase sales of the chips division by $275,000. The variable expenses for the chips division are 315,000/900,000 = 35%. Therefore, the increase in contribution margin will be $275,000 * (1 - 35%) = $178,750. The traceable fixed expenses will remain the same, so the increase in segment margin will be $178,750. The overall net effect on the company's total profits will be an increase of $178,750.

WSR Inc WSR Inc WSR’s Management Is Considering a Special Advertising Campaign That Will

WSR Inc
WSR Inc WSR’s Management Is Considering a Special Advertising Campaign That Will