Star Corporation management has budgeted the following amounts for its next fiscal year:
Total fixed expenses $450,000
Selling price per unit $50
Variable expenses per unit $25
If Star Corporation spends an additional $20,000 on advertising, sales volume should increase by 3,000 units. What effect will this have on operating income?
A) Increase of $75,000
B) Increase of $55,000
C) Decrease of $55,000
D) Decrease of $75,000
B
Explanation: B)
Sales $50.00
Less Variable expenses 25.00
Contribution Margin $25.00
× Add'l units × 3,000
Add'l CM $75,000
Less Advertising expense 20,000
= Operating Income Increase $55,000
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