Question

Titanic Roofing Company has estimated the following amounts for its next fiscal​ year: Total fixed costs $ 833 comma 000 Sale price per unit 60 Variable cost per unit 30 If the company spends an additional $ 30 comma 000 on​ advertising, sales volume would increase by 2 comma 500 units. Before the​ change, the​ company's sales level exceeds the breakeven point. What effect will this decision have on the operating income of​ Titanic? A. Operating income will decrease by $ 45 comma 000. B. Operating income will increase by $ 45 comma 000. C. Operating income will increase by $ 75 comma 000. D. Operating income will increase by $ 150 comma 000.

Answer 1

Answer: B. Operating income will increase by $ 45,000

Explanation:

Total fixed cost = $833,000

Sale price per unit = 60

Variable cost per unit = 30

Advertising = $30,000

Increase in sales volume = 2500

The contribution margin is the difference between the sales price per unit and the variable cost per unit.

= 60 - 30

= 30

Therefore, Hence the increase in the contribution margin will be:

= ($30 × 2500)=$75000

We then subtract the additional cost of $30,000 from $75,000. This will be:

= $75,000 - $30,000

= $45,000

Therefore, operating income will increase by $45,000