Question

Titanic Roofing Company has estimated the following amounts for its next fiscal year: Total fixed expenses $832,500 Sale price per unit 40 Variable expenses per unit 25 If the company spends an additional $30,000 on advertising, sales volume would increase by 2,500 units. What effect will this decision have on the operating income of Evans?

A) Operating income will increase by $37,500.
B) Operating income will increase by $7,500.
C) Operating income will increase by $70,000
D) Operating income will decrease by $62,500.

Answer 1

B) Operating income will increase by $7,500

Step-by-step explanation:

First we calculate contribution per unit which would be as follows:

Sale price per unit - Variable price per unit = Contribution price unit

40 - 25 = $15 per unit

Then we multiple it by the additional increase in units of 2,500.

15 * 2,500 = $37,500

Finally, we subtract it with the cost incurred for additional spending.

37,500 - 30,000 = $7,500

Hence, the impact of the decision would mean the income has increased by $7,500 in comparison to the expenses incurred.

Answer 2

The correct answer is B.

Step-by-step explanation:

Giving the following information:

Total fixed expenses $832,500

Sale price per unit 40

Variable expenses per unit 25

If the company spends an additional $30,000 on advertising, sales volume would increase by 2,500 units.

Effect on income= 2,500*(40 - 25) - 30,000= $7,500