Synergy Company expects the following results for the next accounting period:
The sales manager believes that sales could be increased by 500 units if advertising expenditures were increased by $14,000.Which of the following is the effect on operating income if an increase in the advertising expenditures result in an increase in sales by 500 units? (Note: Round the sale price per unit and the variable cost per unit to two decimal places.)
A) Increase of $575
B) Increase of $220
C) Increase of $280
D) Increase of $450
E) Cannot be determined from the data given

Question

Synergy Company expects the following results for the next accounting period:  
 The sales manager believes that sales could be increased by 500 units if advertising expenditures were increased by $14,000.Which of the following is the effect on operating income if an increase in the advertising expenditures result in an increase in sales by 500 units? (Note: Round the sale price per unit and the variable cost per unit to two decimal places.)
A) Increase of $575 
B) Increase of $220 
C) Increase of $280 
D) Increase of $450 
E) Cannot be determined from the data given

Quizplus · Accepted Answer

Selling price = Sales / Units sold = $250,000 / 3,500 units = $71.43
Variable cost per unit = Variable cost / Units produced = $150,000 / 3,500 units = $42.86
Operating income prior to the change in advertising expenditures = (Sales - Variable cost - Fixed costs) = ($250,000 - $150,000 - $50,000) = $50,000
Operating income after the change in sales volume = (Sales - Variable cost - Fixed costs) = {[$71.43 × (3500 + 500)] - [$42.86 × (3500 + 500)] - $64,000} = $285,720 - $171,440 -$64,000 = $50,280
Change in operating income = ($50,280 - $50,000) = $280

Synergy Company Expects the Following Results for the Next Accounting