Wilson Company prepared the following preliminary budget assuming no advertising expenditures:
$\begin{array}{|l|r|}
\hline \text { Selling price } & \$ 10 \text { per unit } \
\hline \text { Unit sales } & 100,000 \
\hline \text { Variable expenses } & \$ 600,000 \
\hline \text { Fixed expenses } & \$ 300,000 \
\hline
\end{array}$
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

Quizplus · Accepted Answer

The new selling price is $11.50 (10 + 15% of 10). New unit sales are 110,000 (100,000 + 10% of 100,000). Revenue is $1,265,000 (110,000 units * $11.50). Variable expenses are $660,000 (110,000 units * $6). Fixed expenses are $400,000 ($300,000 + $100,000 advertising). Operating income is $205,000 ($1,265,000 - $660,000 - $400,000).

Wilson Company Prepared the Following Preliminary Budget Assuming No Advertising