Barco,Inc.decided to institute an advertising campaign that would cost $75,000.Variable costs will remain at $15 per unit.Barco is currently selling 100,000 units of its product at $25 per unit.The Marketing Department is estimating that there will be a 10 percent increase in sales volume.With all else remaining the same,what will be the result of this decision?

Question

Quizplus · Accepted Answer

The advertising campaign will cost $75,000, which is a fixed cost that will not change with the increase in sales volume. However, with a 10% increase in sales volume, Barco, Inc. will sell an additional 10,000 units (100,000 x 0.10 = 10,000). This will generate an additional revenue of $250,000 (10,000 units x $25 per unit). The total variable cost for these additional units will be $150,000 (10,000 units x $15 per unit). Therefore, the total contribution margin will be $100,000 ([$250,000 - $150,000] + [$250,000 - $15,000 x 100,000]). Subtracting the fixed cost of $75,000 from the contribution margin of $100,000 gives us an increase in operating income of $25,000.

Barco,IncDecided to Institute an Advertising Campaign That Would Cost $75,000