Question

Hansen's fixed costs are 55% of sales. The company is contemplating an advertising campaign that will cost $33,000. If this advertising campaign is anticipated to increase sales by $70,000, how much will the company's income change?

Answer 1

Variable cost = 55% of sales

Since variable costs are 55% of sales, hence contribution margin ratio must be 45% of sales

Increase in sales = $70,000

Increase in advertising expenditure = $33,000

Increase in operating income = Increase in sales x contribution margin ratio - Increase in advertising expenditure

= 70,000 x 45% - 33,000

= 31,500 - 33,000

= - $1,500

Due to Increase in advertising expenditure by $33,000, company's income will decrease by $1,500

Note: In the question, it is given that Hansen's fixed costs are 55% of sales, but it must be ' Hansen's variable costs are 55% of sales', otherwise question cannot be solved.