Question

Pharoah's Bakery sells strawberry cakes for $25 each. Last month Brandi sold 1280 cakes. Variable costs were $10 per cake and fixed costs totaled $3360. This month, Pharoah has decided to spend $1120 to sponsor a team for a Relay for Life golf tournament. She believes that the additional advertising from the sponsorship will generate 10% more sales than last month. What will be this month's operating income? O $8960 O $17760 O $16640 O $10080

Answer 1

Selling price per unit = $25

Variable cost per unit = $10

Fixed costs = $3,360

Number of units sold = 1,280

Due to advertising expense of $1,120, sales increased by 10%

Increase in sales = 10%

= 1,280 x 10%

= 128

Number of units sold this month = 1,280+128

= 1,408

Fixed cost this month = 3,360+1,120

= $4,480

Contribution Margin Income Statement
Sales (1,408 x 25)	35,200
Variable cost (1,408 x 10)	-14,080
Contribution margin	$21,120
Fixed costs	-4,480
Operating income	$16,640

This month operating income = $16640.

Third option is correct.

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