1. The following table shows the effect of the proposed change in monthly
advertising budget:
Sales With
Additional
Current Advertising
Sales Budget Difference
Sales... $180,000 $189,000 $ 9,000
Less variable expenses .... 126,000 132,300 6,300
Contribution margin ... 54,000 56,700 2,700
Less fixed expenses... 30,000 35,000 5,000
Net operating income ... $ 24,000 $ 21,700 $(2,300)
Assuming no other important factors need to be considered, the in-
crease in the advertising budget should not be approved since it would
lead to a decrease in net operating income of $2,300.
Alternative Solution 1
Expected total contribution margin:
$189,000 × 30% CM ratio... $56,700
Present total contribution margin:
$180,000 × 30% CM ratio... 54,000
Incremental contribution margin ... 2,700
Change in fixed expenses:
Less incremental advertising expense... 5,000
Change in net operating income ... $(2,300)
Alternative Solution 2
Incremental contribution margin:
$9,000 × 30% CM ratio ... $ 2,700
Less incremental advertising expense ... 5,000
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