Hammer Company expects the following results for the next accounting period: $\begin{array}{lr}
\text { Sales } & \$ 240,000 \
\text { Variable costs } & \$ 135,000 \
\text { Fixed costs } & \$ 40,000 \
\text { Expected production and sales in units } & 3,000
\end{array}$ The sales manager believes sales could be increased by 400 units if advertising expenditures are increased by $10,000. Suppose advertising expenditures are increased and sales increase by 400 units. What will be the effect on operating income?
A) a decrease of $4,000
B) an increase of $4,000
C) an increase of $22,000
D) an increase of $30,000

Question

Quizplus · Accepted Answer

The increase in sales revenue from 400 additional units is $32,000 (400 units x $80 per unit). The variable cost for these units is $18,000 (400 units x $45 per unit). The increase in operating income is $32,000 - $18,000 - $10,000 (additional advertising) = $4,000.

Hammer Company Expects the Following Results for the Next Accounting