Required Information The following information applies to the questions displaye

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Required Information The following information applies to the questions displayed below Hudson Co. reports the contribution margin income statemeot for 2017. HUDSON Co. Contribution Margin Income Statement For Year Ended December 31, 2817 Sales (10,000 units at $300 each) Variable costs (10,00e units at $240 each) Contribution margin Fixed costs Pretax income $3,000,000 2,400,00e S 600,900 420,000 $ 180,000 The marketing manager believes that increasing advertising costs by $176.000 in 2018 will increase the company's sales volume to 1400 units. Prepare a forecasted contribution margin income statement for 2018 assuming the company incurs the additional advertising costs. HUDSON Co. Forecasted Contribution Margin Income Statement For Year Ended December 31, 2018 Sales Variable costs Contribution margin Fixed costs Income (pretax) Should the company incur the additional advertising costs?

Explanation / Answer

1 Sales 3420000 Variable costs 2736000 Contribution margin 684000 Fixed costs 596000 Income(Pretax) 88000 Yes, incur the advertising costs 1 Degree of operating leverage = Contribution margin/Net operating income =492000/123000= 4 2 Decrease in income=4*5%=20% Pretax income = 123000-(123000*20%)= $98400 3 Sales 1869600 Variable costs 1402200 Contribution margin 467400 Fixed costs 369000 Income(Pretax) 98400

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