Hoppy Cat Toy Company has estimated the following amounts for its next fiscal year: $$\begin{array} { | l | r | }
\hline \text { Total fixed expenses } & \$ 833,500 \
\hline \text { Sale price per unit } & 40 \
\hline \text { Variable expenses per unit } & 25 \
\hline
\end{array}$$ If the company spends an additional $34,000 on advertising,sales volume would increase by 2,900 units.What effect will this decision have on the operating income?

Question

Hoppy Cat Toy Company has estimated the following amounts for its next fiscal year: $$\begin{array} { | l | r | } 
\hline \text { Total fixed expenses } & \$ 833,500 \
\hline \text { Sale price per unit } & 40 \
\hline \text { Variable expenses per unit } & 25 \
\hline
\end{array}$$ If the company spends an additional $34,000 on advertising,sales volume would increase by 2,900 units.What effect will this decision have on the operating income?

Quizplus · Accepted Answer

The additional advertising increases sales by 2,900 units. The contribution margin per unit is $40 - $25 = $15. The total additional contribution is 2,900 units * $15 = $43,500. After subtracting the $34,000 advertising cost, the net increase in operating income is $43,500 - $34,000 = $9,500.

Hoppy Cat Toy Company Has Estimated the Following Amounts for Its