Titanic Roofing Company has estimated the following amounts for its next fiscal year: $$\begin{array} { | l | r | }
\hline \text { Total fixed costs } & \$ 840,000 \
\hline \text { Sale price per unit } & 80 \
\hline \text { Variable cost per unit } & 30 \
\hline
\end{array}$$ If the company spends an additional $35,000 on advertising,sales volume would increase by 2500 units.Before the change,the company's sales level exceeds the breakeven point.What effect will this decision have on the operating income of Titanic?

Question

Titanic Roofing Company has estimated the following amounts for its next fiscal year: $$\begin{array} { | l | r | } 
\hline \text { Total fixed costs } & \$ 840,000 \
\hline \text { Sale price per unit } & 80 \
\hline \text { Variable cost per unit } & 30 \
\hline
\end{array}$$ If the company spends an additional $35,000 on advertising,sales volume would increase by 2500 units.Before the change,the company's sales level exceeds the breakeven point.What effect will this decision have on the operating income of Titanic?

Quizplus · Accepted Answer

The additional advertising will increase sales volume by 2500 units, which will increase revenue by 2500 * $80 = $200,000. The additional advertising cost is $35,000, so the net effect on operating income will be $200,000 - $35,000 = $165,000. However, the question states that the company's sales level exceeds the breakeven point before the change, so the operating income will increase by $165,000.

Titanic Roofing Company Has Estimated the Following Amounts for Its