Requirement 3 Mr Neylon estimates that he can increase units

Requirement 3. Mr. Neylon estimates that he can increase units sold, and hence revenues by 20 % by incurring additional advertising costs of $ 8 000 . Calculate the impact of the additional advertising costs on operating income.

Determine the formula to solve for the amount then complete the formula.___________ -____________ = Change in operating income

Solution

As Mr. Neylon can increase his revenue by 20%, then his contibution will also get increased in the same proportion of revenue. i.e. if mr. Neylon\'s existing revenue is $500000, then his revenue will get increase by $100000.

Now, as revenue increases by $100000, his conribution will increase on the increased revenue.

Increased Contribution= Increased revenue multiplied by contributon margin.
For claculating change in operating income, we have to deduct Incremental fixed costs (advertising cost = $8000) from the increased amount of contribution.

hence, Change in operating income = Incremental contrbution -  Incremental fixed costs (advertising cost)