Question

Bassman Company operates on a contribution margin of 30% and currently has fixed costs of $400,000. Next year, sales are projected to be $2,000,000. An advertising campaign is being evaluated that costs an additional $60,000. How much would sales have to increase to justifythe additional expenditure? A) $120,000 B) $180,000 C) $200,000 D) $600,000 Also find profits before and profits after tax

Answer 1

A	Increase in Fixed Cost	$           60,000.00
B	CM ratio	30%
C = A/B	Additional Sales required	$         200,000.00

• Correct Answer = $ 200,000 Option ‘C’

$ 200,000 increase in Sale will justify additional expense of $ 60,000 on advertising.

This can be illustrated below:

	Normal Sales without Advertising	Normal Sales with Advertising	Normal + Additional Sales with Advertising
Sales	$     2,000,000.00	$    2,000,000.00	$    2,200,000.00
CM ratio	30%	30%	30%
Contribution margin	$         600,000.00	$        600,000.00	$       660,000.00
Fixed Cost	$         400,000.00	$        460,000.00	$       460,000.00
Net Income	$         200,000.00	$        140,000.00	$       200,000.00

• You’ll notice that Net Income will be same ($200,000) if sales are increased by $ 200,000 along with $ 60,000 increase in fixed cost.
• No Info provided regarding tax.