Question

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(A) $11,000.(B) $23,000.(C) $16,000.(D) $18,000.

Answer 1

(A) $11,000.

Step-by-step explanation:

Since the fixed cost except the variable cost is always fixed, and even with the increase in output will not provide for increase in fixed cost.

As a part only variable cost in same proportion and accordingly the contribution shall increase with the same ratio that is 40% of sales.

Increase in sales revenue = $45,000

Increased contribution = $45,000
`*` 40% = $18,000

Less: Increased cost for such sale = $7,000

Net increase in operating income = $18,000 - $7,000 = $11,000.