Northern Territory Adventure Company operates on a contribution margin of 35% 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 $70 000.How much would sales have to increase to justify the additional expenditure?

Question

Quizplus · Accepted Answer

The contribution margin is 35% of sales, so the company's contribution margin will be (($2,000,000 x 35%) - $400,000) = $300,000.

If the advertising campaign is undertaken for $70,000, then the company's fixed costs will be $470,000 ($400,000 + $70,000).

To find out how much sales need to increase to justify this additional expenditure, we can use the formula:

New contribution margin = (New sales x Contribution margin percentage) - Total fixed costs

$300,000 + $70,000 (additional fixed cost due to advertising) = (New sales x 0.35) - $470,000

370,000 = 0.35(New sales) - $470,000

0.35(New sales) = $840,000

New sales = $2,400,000

Therefore, sales would have to increase by $400,000 ($2,400,000 - $2,000,000) to justify the additional expenditure on advertising. The closest in value to this is answer C.

Northern Territory Adventure Company Operates on a Contribution Margin of 35