Question

Dunbar Manufacturing's variable costs are 30% of sales. The company is contemplating an advertising campaign that will cost $55,000. If sales are expected to increase $100,000, by how much will the company's net income increase? a. $45,000 b. $70,000 c. $30,000 d. $15,000 AIDAD D E ANDALAR . . . . . .. . . ..

Answer 1

Ans. 92	Option d   $15,000
	Variable costs are 30% of sales, it means that the contribution margin ratio will be
	70% of sales because contribution margin is the difference between sales and variable cost.
	Incremental contribution margin =   Increases in sales * Contribution margin ratio
		$100,000 * 70%
		$70,000
	*Advertising is a fixed cost, so for the calculation of increase in net income, we need to subtract
	the advertising cost from increamental contribution margin.
	Increamental contribution margin	$70,000
	Less: Advertising cost	$55,000
	Increase in net income	$15,000
Ans. 113	Option b   40,000
	Particulars	Amount
	Sales	$1,000,000
	Less: Variable costs:
	Direct materials and labor	$500,000
	Other variable costs	$50,000
	Total variable cost	$550,000
	Contribution margin	$450,000
	Contribution margin per unit = Contribution margin / Units sold
	$450,000 / 50,000
	$9 per unit
	Break even point (in units)   =   Total fixed cost/ Contribution margin per unit
	$360,000 / $9
	40000	units