Knapp 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 by2,500 units.What effect will this decision have on the operating income of Evans?

Question

Knapp 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 by2,500 units.What effect will this decision have on the operating income of Evans?

Quizplus · Accepted Answer

The additional advertising will increase sales volume by 2,500 units. The contribution margin per unit is $50 ($80 - $30). Therefore, the additional sales will generate $125,000 in additional contribution margin ($50 x 2,500). The additional advertising expense of $35,000 will reduce the operating income by $35,000. Therefore, the net effect of the decision will be to increase the operating income by $90,000 ($125,000 - $35,000).

Knapp Roofing Company Has Estimated the Following Amounts for Its