Sally Corporation management has budgeted the following amounts for its next fiscal year: $$\begin{array} { | l | r | }
\hline \text { Total fixed expenses } & \$ 425,000 \
\hline \text { Sale price per unit } & \$ 50 \
\hline \text { Variable expenses per unit } & \$ 30 \
\hline
\end{array}$$ If Sally Corporation spends an additional $15,000 on advertising,sales volume should increase by 1,000 units.What effect will this have on operating income?

Question

Sally Corporation management has budgeted the following amounts for its next fiscal year: $$\begin{array} { | l | r | } 
\hline \text { Total fixed expenses } & \$ 425,000 \
\hline \text { Sale price per unit } & \$ 50 \
\hline \text { Variable expenses per unit } & \$ 30 \
\hline
\end{array}$$ If Sally Corporation spends an additional $15,000 on advertising,sales volume should increase by 1,000 units.What effect will this have on operating income?

Quizplus · Accepted Answer

The additional sales revenue from 1,000 units is $50,000 (1,000 units x $50), and the additional variable cost is $30,000 (1,000 units x $30), resulting in an increase in contribution margin of $20,000. After subtracting the $15,000 advertising cost, the net increase in operating income is $5,000.

Sally Corporation Management Has Budgeted the Following Amounts for Its