A company typically earns a contribution margin ratio of 25%and has current fixe

Question

A company typically earns a contribution margin ratio of 25%and has current fixed costs of $80,000. The general manageris considering spending an additional $20,000 to do one of thefollowing: 1. Start a new ad campaignthat's expected to increase salesrevenue by 5%. 2. License a new computerized ordering system that is expectedto increase the comtribution margin ratio by 30%. Sales revenue for the coming year was initially forecast toequal $1,200,000(without implementing either option) Question: For each option, how much will projected operatingincome increase or decrease relative to initial predictions? A company typically earns a contribution margin ratio of 25%and has current fixed costs of $80,000. The general manageris considering spending an additional $20,000 to do one of thefollowing: 1. Start a new ad campaignthat's expected to increase salesrevenue by 5%. 2. License a new computerized ordering system that is expectedto increase the comtribution margin ratio by 30%. Sales revenue for the coming year was initially forecast toequal $1,200,000(without implementing either option) Question: For each option, how much will projected operatingincome increase or decrease relative to initial predictions?

Explanation / Answer

Projectedoperating income without either investment

($1,200,000 × 0.25 )- $80,000

$220,000

AdCampaign

OrderingSystem

Projectedsales revenue

$1,260,000 ($1,200,000 × 1.05)

$1,200,000

× CMratio

0.25

0.30

Totalcontribution margin

$31,5000

$360,000

Minusfixed cost

($100,000)

($100,000)

Operatingincome

$215,000

$260,000

Thus projected operating revenues will decrease by $5,000 if thead campaign is chosen ($215,000-$220,000), and increase by$40,000($260,000-$220,000) if the ordering system is chosen.

Projectedoperating income without either investment

($1,200,000 × 0.25 )- $80,000

$220,000

AdCampaign

OrderingSystem

Projectedsales revenue

$1,260,000 ($1,200,000 × 1.05)

$1,200,000

× CMratio

0.25

0.30

Totalcontribution margin

$31,5000

$360,000

Minusfixed cost

($100,000)

($100,000)

Operatingincome

$215,000

$260,000

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