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.

Answer 1

$11,000

Step-by-step explanation:

The computation of the monthly increase in operating income is shown below:

= Sales volume × contribution margin ratio - additional spending done on the direct mail advertising

= $45,000 × 40% - $7,000

= $18,000 - $7,000

= $11,000

We simply applied the above formula so that the monthly increase in operating income could be determined.