Question

Barco, Inc., decided to institute an advertising campaign that will cost $75,000. Variable costs remain at $15 per unit. Barco is currently selling 100,000 units of its product at $25 per unit. The marketing department estimates that there will be a 10% increase in sales volume. With all else remaining the same, what will be the result of this decision?

An increase in operating income of $25,000
A decrease in operating income of $75,000
An increase in sales of $25,000
none of the above

Answer 1

After calculating the additional revenue and subtracting the additional variable costs and advertising campaign cost, Barco, Inc. will see an increase in operating income of $25,000.

Step-by-step explanation:

To determine the impact of an advertising campaign on Barco, Inc.'s operating income, we need to calculate the additional revenue generated from the increase in sales and then subtract the cost of the advertising campaign. The current sales are 100,000 units at $25 per unit. With a 10% increase, sales volume will be 110,000 units. The additional units sold would be 10,000 units (10% of 100,000).

Let's calculate the additional revenue and the additional variable cost:

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The change in operating income is the additional revenue minus additional variable costs and the cost of the advertising campaign.

Change in Operating Income = $250,000 - $150,000 - $75,000 = $25,000

Therefore, the result of the decision to advertise will be an increase in operating income of $25,000, assuming all other factors remain constant.