Question

Information for Drone On Limited is shown below:

 

	Per Unit	Percentage of Sales
Selling price	$1,000	100%
Variable expenses	800	80%
Contribution margin	$200	20%

 

Total fixed expenses are $100,000 per month, and Drone On Limited is selling 1,000 drones per month.

 

Required:

The marketing manager argues that a $5,000 increase in the monthly budget to prepare webinars would increase monthly sales by 50 drones. Should the webinar budget be increased?

Answer 1

The following table shows the effect of the proposed change in monthly advertising budget:

 

	Current Sales	Sales with additional webinar budget	Difference
Unit sales	1,000	1,050	50
Sales	$1,000,000	$1,050,000	$50,000
Variable expenses	$800,000	$840,000	$40,000
Contribution margin	$200,000	$210,000	$10,000
Fixed expenses	$100,000	$105,000	$5,000
Operating income	$100,000	$105,000	$5,000

Assuming that there are no other important factors to be considered, the increase in the webinar budget should be approved since it would lead to an increase in operating income of $5,000.

The increase in the webinar budget should be approved since it would lead to an increase in operating income of $5,000.