Question

The Clyde Corporation's variable expenses are 40% of sales. Clyde Corporation is contemplating an advertising campaign that will cost $25,000. If sales increase by $75,000, the company's net operating income will increase by:

Answer 1

Answer:

The net increase in operating income would amounts to $ 20,000

Explanation:

Computing the contribution margin ratio using the formula as:

Contribution Margin (CM) ratio = 1 - Variable expense ratio

where

Variable expense ratio is 40% or 0.40

Contribution Margin ratio  1 - 0.40

Contribution Margin ratio = 0.6

Now, computing the increase in the net operating income as:

Increase in net operating income = (Contribution Margin ratio × Increase in sales) - Increase in fixed expenses

where

Contribution Margin ratio is 0.6

Increase in Sales is $75,000

Increase in fixed expenses is $25,000

Putting the values above:

Increase in net operating income = (0.6 × $75,000) - $25,000

Increase in net operating income = $45,000 - $25,000

Increase in net operating income = $20,000