Arrow Products typically earns a contribution margin ratio of 25 percent and has current fixed costs of $80,000. Arrow’s general manager is considering spending an additional $20,000 to do one of the following:
1. Start a new ad campaign that is expected to increase sales revenue by 5 percent.
2. License a new computerized ordering system that is expected to increase Arrow’s contribution margin ratio to 30 percent.
Sales revenue for the coining year was initially forecast to equal $1,200,000 (that is, without implementing either of the above options).
a. For each option, how much will projected operating income increase or decrease relative to initial predictions?
b. By what percentage would sates revenue need to increase to make the ad campaign as attractive as the ordering system?
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