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Danson & Highsmith LLC expects the following results for the next accounting period: Sales Variable costs Fixed costs Expected production and sales in units $390,000 $187,200 $124,000 5,200 The sales manager believes sales could be increased by 900 units if advertising expenditures were increased by $17,000. If advertising expenditures are increased and sales increase by 900 units, the effect on operating income will be an) a. Decrease of $18,100 b. Decrease of $35,100 © Increase of $18,100 d. Increase of $35,100

Answer 1

Operating income =

= Sales revenue - cost of goods sold

(Here, cost of goods sold include all fixed expenditure and variable expenditure)

Normal operating income :-

= Sales - ( fixed cost + variable cost)

= $390000 - ( $124000 + 187200)

= $78800

Calculation of operating income if increase in advertising.

In this case manager expected to increase sales by 900 units then it also leads to increase in variable cost.

Now we need to calculate the variable cost for 6100units (5200 + 900).

Variable cost for 5200 units is $187200 then variable cost for 6100 units is $219600

Extra advertisement expenses was $17000

Fixed cost remain constant = $124000

Sales price per unit is $75 (390000 ÷ 5200) but now the sales is increased by 900 units then the total sale revenue = $75 × 6100 units = $457500

Operating income =

= $457500 - ( $124000 + $219600 + $17000)

= $457500 - ($360600)

= $96900.

By comparing both the operating incomes

= $96900 - $78800

= $18100

By comparing both the operating incomes we get that there is an increase in operating income to the extent of $18100.

By all the above calculation and information we can say that the answer is option C - Increase of $18100.

These are all the information required to solve the given question.

I hope, all the above mentioned information and explanations are useful and helpful to you.

Thank you.