Question

Staley Co. manufactures computer monitors. The following is a summary of its basic cost and revenue data:

	Per Unit					Percent
Sales price		$	420				100.00
Variable costs			217				51.67
Unit contribution margin		$	203				48.33

Assume that Staley Co. is currently selling 550 computer monitors per month and monthly fixed costs are $79,300.

If an $15,800 increase in the advertising budget would increase monthly sales by $59,300, the new level of operating income (π_B) for Staley Co. would be:

Answer 1

Current operating income

= Contribution margin - Fixed cost

= 203*550 - 79,300

= $32,350

Revised operating income

Increased sales = 59,300

Increased contribution = 59,300*48.33% = $28,659.69

Increased fixed cost = $15,800

Therefore the operating income will increase by

= 28,659.69 - 15,800

= $12,859.69

Therefore new operating income

= 32,350 + 12,859.69

= $45,210.

Closest to $45,212 ( Due to rounding off there is a difference of $2)

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