Arkansas Co. has total fixed costs of $17,414 and a contribution margin ratio of

Question

Arkansas  Co. has total fixed costs of $17,414 and a contribution margin ratio of 42%. Assume that an additional advertising expenditure of $3,062 would increase sales by $8,190. The company wants to know if they should spend this additional amount on advertising. What would be the net increase or decrease in income if they make the additional expenditure?  Answer to nearest whole dollar without any commas or decimal points eg. 1000 not 1,000.00 Enter a negative number as -10 not (10). Indicate an increase as a positive number and a decrease as a negative number.

Explanation / Answer

Total fixed cost = 17414 Contribution margin ratio = 42% Additiona advertising expenditure = 3062 Incurring Additiona advertising expenditure Increses sales by = 8190 Contribution margin on Increased sales = 8190 X 42% = 3440 Net increase or decrease in income = Contribution margin on Increased sales - Additiona advertising expenditure = 3440 - 3062 Net Increase in income = 378 Therefore, if the comapany spend additional advertising expensiture it's Net income will increases by 378 Note: Fixed cost is irrelevant for decision making.

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