How much will a company's net operating income change if it undertakes an advertising campaign given the following data:

How much will a company's net operating income change if it undertakes an advertising campaign given the following data:

Cost of advertising campaign	$	25,000
Variable expense as a percentage of sales		42	%
Increase in sales	$	60,000

Multiple Choice

• $15,000 increase
• $200 increase
• $9,800 increase

  Correct
• $25,200 increase

Explanation

CM ratio = 1 – Variable expense ratio = 1 – 0.42 = 0.58

Increase in net operating income = CM ratio × Increase in sales – Increase in fixed expenses

= (0.58 × $60,000) – $25,000 = $34,800 – $25,000 = $9,800