Hammer Company expects the following results for the next accounting period: 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?
$\begin{array}{lr}
\text { Sales } & \$ 240,000 \
\text { Variable costs } & \$ 135,000 \
\text { Fixed costs } & \$ 40,000 \
\text { Expected production and sales in units } & 3,000
\end{array}$

Question

Quizplus · Accepted Answer

To calculate the effect on operating income, first determine the contribution margin per unit and then assess the impact of the increased advertising expenditure. The contribution margin per unit is calculated as follows: (Sales - Variable Costs) / Units = ($240,000 - $135,000) / 3,000 = $35 per unit. With an increase of 400 units, the additional contribution margin is 400 units * $35 = $14,000. After accounting for the $10,000 increase in advertising expenditures, the net effect on operating income is an increase of $4,000.

Hammer Company Expects the Following Results for the Next Accounting