Baldwin Company's product Best has Fixed Costs of $12,000, sales of 10,000 units, selling price per...
Baldwin Company's product Best has Fixed Costs of $12,000, sales of 10,000 units, selling price per unit of $30, and a contribution margin ratio of 40%. Baldwin is considering investing in a Marketing program that costs $20,000 and is projected to increase sales volume by 10%. All else constant, if Baldwin makes this decision based on a minimum acceptable ROI in the first year of 50% for the project, should they invest in this marketing program?
The answer is "Yes, because the investment will increase Baldwin's Contribution Margin by $12,000 and their Fixed Costs by $20,000 resulting in a 60% ROI for this investment in the first year "
But I don't understand how the contribution margin increase by $12,000.
Homework Answers
Earlier the sales was 10,000 units @ $30.
So, the sales were 10000×30 = $3,00,000.
And the contribution margin is 40%.
So, contribution = 3,00,000×40% = $1,20,000.
Now, the sales is increasing by 10%.
So, the sales is 3,00,000×110% = $3,30,000.
Only fixed cost increases by 20,000. Else every thing remains constant.
So, contribution margin is 3,30,000×40% = $1,32,000.
In this way, contribution margin increase by $12,000.
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