Question

Required Information The following Information applies to the questions displayed below.) Hudson Co. reports the contribution margin Income statement for 2019. HUDSON CO. Contribution Margin Income Statement For Year Ended December 31, 2019 Sales (10,300 units at $375 each) Variable costs (10,300 units at $300 each) Contribution margin Fixed costs Pretax income $3,862,500 3,090, eee 772,500 6ee, eee $ 172,5ee The marketing manager believes that increasing advertising costs by $165,000 in 2020 will increase the company's sales volume to 11,700 units. Prepare a forecasted contribution margin Income statement for 2020 assuming the company Incurs the additional advertising costs. HUDSON CO. Forecasted Contribution Margin Income Statement For Year Ended December 31, 2020 Sales Variable costs Contribution margin Fixed costs Income (pretax)/Loss Should the company incur the additional advertising costs?

Answer 1

Solution -

Forecasted contribution margin Income Statement Particulars Sales (11700 * $375) Variable costs (11700*$300) Contribution margin Fixed costs ($600,000+$165,000) Amount (In $) 43,87,500 35,10,000 8,77,500 7,65,000 Pretax income 1,12,500 Note: We will consider advertisement cost as fixed cost and computation has been done as per the same.

No, company should not incur the additional advertisement costs because the pretax income will be decrease by $60000 ($172500-$112500) and additional costs will be also beared.