Olsen Auto Supply earns a contribution margin ratio of 40 percent. The store manager estimates that by spending an additional $5,000 per month for radio advertising, the store will be able to increase its operating income by $3,000 per month. The manager is expecting the radio advertising to increase monthly sales volume by:

Question

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The increase in operating income of $3,000 is achieved by increasing sales. With a contribution margin ratio of 40%, the additional sales needed to achieve this increase is $3,000 / 0.40 = $7,500. However, the $5,000 cost of advertising must also be covered, so the total increase in sales needed is ($3,000 + $5,000) / 0.40 = $20,000.

Olsen Auto Supply Earns a Contribution Margin Ratio of 40