Question

Requirement 4. Xavier​'s top management is deciding whether to embark on a $ 200 comma 000 advertising campaign. The marketing firm has projected annual sales volume to increase by 18​% as a result of this campaign. Assuming that the projections are​ correct, what effect would this advertising campaign have on the​ company's annual operating​ income? If Xavier embarks on this advertising campaign, sales revenue and variable costs will rise by 18 %, which will cause the contribution margin to increase by 18 %. However, fixed costs will rise by $ 200,000 due to the advertising. What effect would this advertising campaign have on Xavier​'s annual operating​ income? The effect would be an increase in operating income of $ 3900000 .

Xavier Medical Supply is a retailer of home medical equipment. Last year, Xavier's sales revenues totaled $6,200,000. Total expenses were $2,500,000. Of this amount, approximately $1,612,000 were variable, while the remainder were fixed. Since Xavier's offers thousands of different products, its managers prefer to calculate the breakeven point in terms of sales dollars rather than units. Read the requirements. Requirement 3. wnat is the company's breakeven point in sales dollars? (Hint: ine contribution margin ratio calculated in Requirement 2 is already weighted by the company's actual sales mix.) Begin by identifying the formula to compute the breakeven point in sales dollars. Fixed expenses + Operating income / Contribution margin ratio = Breakeven sales in dollars (Round your answer up to the nearest whole dollar.) The breakeven point in sales dollars is $ 1,200,000 Requirement 4. Xavier's top management is deciding whether to embark on a $200,000 advertising campaign. The marketing firm has projected annual sales volume to increase by 18% as a result of this campaign. Assuming that the projections are correct, what effect would this advertising campaign have on the company's annual operating income? If Xavier embarks on this advertising campaign, sales revenue and variable costs will will cause the contribution margin to increase by 18 %. However, fixed costs will rise rise by by $ 18 %, which 200,000 due to the advertising. What effect would this advertising campaign have on Xavier's annual operating income? The effect would be an increase in operating income of $ 3900000

Answer 1

4.

If xavier embarks on this advertising campaign, sales revenue and variable costs will rise by 18%, which will cause the contribution margin to increase by 18%. However fixed costs will rise by $200,000 due to the advertising.

The effect would be an increase in operating income of $625,840.

Working notes :

Increase in operating income = Increase in contribution margin - Increase in fixed costs

Increase in operating income = $(6,200,000-1,612,000) * 18% - $200,000

Increase in operating income = $4,588,000*18% - 200,000

Increase in operating income = $825,840 - 200,000 = $625,840