Royal Corporation management has budgeted the following amounts for its next fiscal year: $$\begin{array} { | l | r | }
\hline \text { Total fixed expenses } & \$ 580,000 \
\hline \text { Sale price per unit } & \$ 60 \
\hline \text { Variable expenses per unit } & \$ 40 \
\hline
\end{array}$$ 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: $$\begin{array} { | l | r | } 
\hline \text { Total fixed expenses } & \$ 580,000 \
\hline \text { Sale price per unit } & \$ 60 \
\hline \text { Variable expenses per unit } & \$ 40 \
\hline
\end{array}$$ 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

To calculate the impact on operating income, we need to first find the contribution margin per unit.

Contribution Margin per Unit = Selling Price per unit - Variable Cost per unit

= $45 - $25

= $20

If the sales volume increases by 2,300 units, the total increase in contribution margin will be:

= $20 x 2,300

= $46,000

Since there are no other changes in the budgeted amounts, the increase in contribution margin will directly result in an increase in operating income. Therefore, operating income will increase by $34,500 ($46,000 - $11,500).

Royal Corporation Management Has Budgeted the Following Amounts for Its