Question

Prince Paper has budgeted the following amounts for its next fiscal year: Total fixed expenses $500,000 Selling price per unit $75 Variable expenses per unit $25 If Price Paper spends an additional $12,500 on advertising, sales volume should increase by 2,300 units. What effect will this have on operating income?

Answer 1

Increase in Operating Income of $102,500.

Step-by-step explanation:

Consider the incremental effects as follows

Sales (2,300 × $75) $172,500

Less Variable Costs ( 2,300 × $25) ($57,500)

Contribution $115,000

Less Fixed Costs ($12,500)

Change in Operating Income $102,500

Therefore,

The effect is an Increase in Operating Income of $102,500.