Montclair Company earns an average contribution margin ratio of 40% on its sales.The local store manager estimates that he can increase monthly sales volume by $45,000 by spending an additional $7,000 per month for direct mail advertising.Compute the monthly increase in operating income if the manager's estimate about the increased sales volume is accurate.

Question

Quizplus · Accepted Answer

The increase in operating income can be calculated by taking the additional sales volume ($45,000) and multiplying it by the contribution margin ratio (40%) to find the increase in contribution margin, then subtracting the additional advertising costs ($7,000). This calculation is: $45,000 * 0.40 - $7,000 = $18,000 - $7,000 = $11,000.

Montclair Company Earns an Average Contribution Margin Ratio of 40