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

The budgeted operating income can be calculated as follows:
Revised sales revenue = (15% increase in unit selling price * 10% increase in unit sales volume * original unit sales volume * original unit selling price) + (original unit sales volume * original unit selling price)
= (1.15 * 1.10 * 100,000 * $5.50) + (100,000 * $5.50)
= $705,000
Revised operating expenses = original operating expenses + advertising expenses
= $300,000 + $100,000
= $400,000
Budgeted operating income = Revised sales revenue – Revised operating expenses
= $705,000 – $400,000
= $305,000
Therefore, the closest option is C = $205,000.

Wilson Company Prepared the Following Preliminary Budget Assuming No Advertising