If a company increases advertising by $500,000, this will cause net operating income to increase if the resulting increase in sales dollars is greater than:

Question

Quizplus · Accepted Answer

The increase in sales dollars must cover the additional advertising cost. The contribution margin ratio indicates how much of each sales dollar contributes to covering fixed costs and profit. Therefore, the increase in sales must be enough to cover the $500,000 increase in advertising, which is calculated by dividing $500,000 by the contribution margin ratio.

If a Company Increases Advertising by $500,000, This Will Cause