Harding is considering an advertising campaign that will cost $15,000 per month from January through March; it is expected to increase sales by 8% a month. At the same time Harding will reduce sales prices to $17.00 per unit while keeping costs steady. Required: (A.) What will operating income be in each of the three months before the advertising campaign?

Operating income = 230000

Operating income = 175000

Operating income = 257500

Explanation:

Assuming that Harding expects to sell 50000, 40000, 55000 units in January, February and March respectively and has a selling price of $15 per unit. Assuming that the variable and fixed costs are as follows;

material $5

labor $3

variable overheads $1.5

total fixed overhead $45000

The operating income in each of the three months would be as follows:

January

Sales = $15*50000

Sales = $750000

total variable costs = ($5 * 50000) + ($3 * 50000) + ($1.5 * 50000)

total variable costs = $475000

Operating income = $750000 - $475000 - $45000

Operating income = 230000

February

Sales = $15*40000

Sales = $600000

total variable costs = ($5 * 40000) + ($3 * 40000) + ($1.5 * 40000)

total variable costs = $475000

Operating income = $600000 - $380000 - $45000

Operating income = 175000

March

Sales = $15*55000

Sales = $825000

total variable costs = ($5 * 55000) + ($3 * 55000) + ($1.5 * 55000)

total variable costs = $522500

Operating income = $825000 - $522500 - $45000

Operating income = 257500