Royal Corporation management has budgeted the following amounts for its next fiscal year:

If Royal Corporation spends an additional $11,500 on advertising,sales volume should increase by 2,300 units.What effect will this have on operating income?

Question

Royal Corporation management has budgeted the following amounts for its next fiscal year:

If Royal Corporation spends an additional $11,500 on advertising,sales volume should increase by 2,300 units.What effect will this have on operating income?

Quizplus · Accepted Answer

First, we need to calculate the contribution margin per unit:
$30 – $20 =$10
Next, we need to calculate the increase in revenue:
2,300 units x $30 per unit = $69,000
Then, we need to calculate the increase in advertising expense:
$11,500
Now we can calculate the increase in operating income:
($69,000 x $10) – $11,500 = $34,500 increase in operating income.

Royal Corporation Management Has Budgeted the Following Amounts for Its