Barco, Inc.decided to institute an advertising campaign that would cost $75,000.Variable costs will remain at $15 per unit.Barco is currently selling 100,000 units of its product at $25 per unit.The marketing department is estimating that there will be a 10 percent increase in sales volume.With all else remaining the same, what will be the result of this decision?

Question

Quizplus · Accepted Answer

By increasing the sales volume by 10%, the number of units sold will increase to 110,000 (100,000 x 1.1). The total revenue from sales will increase to $2,750,000 (110,000 x $25). The variable cost will remain constant at $15 per unit, resulting in a total variable cost of $1,650,000 (110,000 x $15). Deducting the variable cost from the revenue will result in a contribution margin of $1,100,000 ($2,750,000 - $1,650,000). Subtracting the advertising expenses of $75,000 from the contribution margin will give us an operating income of $1,025,000 ($1,100,000 - $75,000). This is an increase from the previous operating income of $1,000,000 (100,000 x $25 - $15 x 100,000) without the advertising campaign, resulting in an increase of $25,000 in operating income. Therefore, the correct answer is A).