Question

6. Refer to the original data. Assume again that the company sold 25,500 units last year. The president feels that it would be unwise to change the selling price. Instead, he wants to increase the sales commission by $6 per unit. He thinks that this move, combined with some increase in advertising, would increase annual unit sales by 50%. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach. The amount by which advertising can be increased is

Answer 1

KLIEN COMPANY
Incremental Analysis Approach
	Current	Proposed	Incremental Increase/ (Decrease)
Sales	$1,147,500	$1,721,250	$573,750
Variable Costs	459,000	918,000	459,000
Contribution	688,500	803,250	114,750
Fixed Expense	420,000	420,000	-
Operating Income	268,500	383,250	114,750
Since,the profit remain unchanged,i.e., the profit remains the same at
$ 268,000, the additional contribution generated by the increased sales
would be the amount by which the advertising costs can be increased.
Hence,
The amount of increase in advertising cost = Incremental Contribution
The amount by which the advertising costs can be increased is	$114,750
Working Notes
	Current	Proposed
Units Sold	25,500	38,250
Sale Price per unit	$45	$45
Sales Value	$1,147,500	$1,721,250
	Current	Proposed
Units Sold	25,500	38,250
Variable Costs per unit	$18	$18
Additional Variable Costs (Increase in Sales Commission)	$0	$6
Total Variable Costs per unit	$18	$24
Total Variable Costs	$459,000	$918,000