Bassman Company operates on a contribution margin of 30% and currently has fixed costs of $400,000. Next year, sales are projected to be $2,000,000. An advertising campaign is being evaluated that costs an additional $60,000. How much would sales have to increase to justify the additional expenditure?
A)$120,000
B)$180,000
C)$200,000
D)$600,000

Question

Quizplus · Accepted Answer

First, we need to find the current contribution margin:
Contribution Margin = Sales Revenue x Contribution Margin Ratio
Contribution Margin = $2,000,000 x 30% = $600,000

Next, we need to determine how much the advertising campaign will reduce the contribution margin:
Contribution Margin $600,000 
Advertising Campaign -$60,000 
New Contribution Margin $540,000

Now, we can calculate how much sales would need to increase in order to justify the additional expenditure:
Fixed Costs + Additional Cost = Sales Revenue x Contribution Margin Ratio
$400,000 + $60,000 = $x x 30%
$460,000 = $0.3x
$x = $1,533,333.33

Therefore, sales would need to increase by $533,333.33 (rounded up to $200,000) to justify the additional expenditure on the advertising campaign.

Bassman Company Operates on a Contribution Margin of 30% and Currently