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com 7. Staley Co manufactures computer monitors. The following is a summary of i

ID: 2431455 • Letter: C

Question

com 7. Staley Co manufactures computer monitors. The following is a summary of its basic revenue data Per Unit Percent 100 85 $480 312 $168 Sales price Variable costs contribution margin Assume that Staley Co. is currently selling 600 computer monitors per month and monthly fixed costs are $80,000. If an $18,000 increase in the advertising budget would increase monthly sales by $60,000, the new level of operating income (Tma) for Staley Co. would be: A $19,800. B. $21,800. ? $24,800. D. $23,800 E. $20,800

Explanation / Answer

Basic Details:

Per unit

Percent

Sales Price

$ 480

100

Variable costs

$ 312

65

Unit Contribution Margin

$ 168

35

Net operating income at current level ( ie. 600 units)

Per unit($ )

Total ($)

Percent

Sales

480

288,000

100

Less: Variable costs

312

187,200

65

Contribution Margin

168

100,800

35

Less: Fixed Costs

80,000

Operating Income/(loss)

20,800

Increase in advertisement budget= $18,000

Increase in monthly sales = $ 60,000

Assuming advertisement expenditure is a fixed cost item the revised profit will be computed as follows.

Revised Sales = $ 288,000+ $ 60,000 = $ 348,000

No.of units = $ 348,000/ $ 480 = 725 units.

Revised fixed cost = $ 80000+ $ 18000= $ 98000

Net operating income at revised level ( ie. 725 units)

Per unit($ )

Total ($)

Percent

Sales

480

348,000

100

Less: Variable costs

312

226,200

65

Contribution Margin

168

121,800

35

Less: Fixed Costs

98,000

Operating Income/(loss)

23,800

Therefore, the correct answer = Option D

Per unit

Percent

Sales Price

$ 480

100

Variable costs

$ 312

65

Unit Contribution Margin

$ 168

35