Question

Refer to the original data (below). The president feels that it would be unwise to change the selling price. Instead, she wants to increase the sales commission by $2 per unit. She thinks that this move, combined with some increase in advertising, would increase sales to 40,000 units compared to 20,000 last year. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach. Original Data:

Stratford Company distributes a lightweight lawn chair that sells for $40 per unit. Variable expenses are $18 per unit, and fixed expenses total $220,000 annually. Results for last year are as follows:
Sales (20,000 units)$800,000

Variable expenses 360,000

Contribution margin 440,000

Fixed expenses 220,000

Operating income$220,000

Answer 1

Answer
	Current year	Last year
Sales Commission	2 per unit
Increase in sales units	40000	20000
Selling price per unit in $	40
Variable expense per unit in $	18
Fixed Expense	$220,000
Sales		800000
Variable expense		360000
Contribution		440000
Fixed Expense		220000
Operating income		220000
	40000 units
Sales @40 per unit	40000*40	1600000
Variable Expense @ 18 per unit	40000*18	720000
Contribution (sales-variabe cost)	(1600000-720000)	880000
Fixed Expense (Contribution-Operating income)		660000
Operating income (remains unchanged)		220000
Fixed expense already incurred is $220000
Advertising expense to be increased is $660000-$220000	$                          440,000.00
Sales commission 2 per unit	2*40000	$ 80,000.00