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: by what percentage would sales revenue need toincrease to make the ad campaign as attractive as the orderingcenter? 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: by what percentage would sales revenue need toincrease to make the ad campaign as attractive as the orderingcenter? 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)

Explanation / Answer

By what percentage would sales revenue need to increase tomake the ad campaign as attractive as the ordering center? By what percentage would sales revenue need to increase tomake the ad campaign as attractive as the ordering center? =================================================================== Total Contribution from Orderingcentre   =   $1,200,000 x 30%                                                                =   $360,000 P/V ratio of adcomapign                        =   25% Desiredrevenue                                       =Desired Contribution / P/V ratio                                                                =   $360,000/ 25%                                                                =   $1,440,000 Reuired increase in sales(%)                     =   ($1,440,000- $1,200,000) / $1,200,000                                                                =   $240,000/ $1,200,000 = 20%

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