Question

Synergy Company expects the following results for the next accounting period Sales Variable costs Fixed costs Expected production and sales in units $250,000 150,000 50,000 3,500 units The sales manager believes that sales could be increased by 500 units if advertising expenditures were increased by $14,000. Which of the following is the effect on operating income if an increase in the advertising expenditures result in an increase in sales by 500 units? (Note: Round the sale price per unit and the variable cost per unit to two decimal places.) a. Increase of $575 b. Increase of $220 c. Increase of $280 d. Increase of $450 e. Cannot be determined from the data given

Answer 1

Answer:

The correct answer is C.

Explanation:

Giving the following information:

Sales= 250,000

Variable costs= 150,000

Fixed costs= 50,000

Expected production and sales in units= 3,500 units

The sales manager believes that sales could be increased by 500 units if advertising expenditures were increased by $14,000.

To calculate the effect on income, we need to calculate the total contribution margin increase and deduct from it the increase in fixed costs.

First, we need to calculate the unitary contribution margin:

Unitary contribution margin= selling price - unitary variable cost

Unitary contribution margin=  250,000/3,500 - 150,000/3,500= $28.57

Effect on income= 500*28.57 - 14,000= $285 increase