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21 April, 13:13

The Clyde Corporation's variable expenses are 40% of sales. Clyde Corporation is contemplating an advertising campaign that will cost $25,000. If sales increase by $75,000, the company's net operating income will increase by:

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  1. 21 April, 15:58
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    The net increase in operating income would amounts to $ 20,000

    Explanation:

    Computing the contribution margin ratio using the formula as:

    Contribution Margin (CM) ratio = 1 - Variable expense ratio

    where

    Variable expense ratio is 40% or 0.40

    Contribution Margin ratio 1 - 0.40

    Contribution Margin ratio = 0.6

    Now, computing the increase in the net operating income as:

    Increase in net operating income = (Contribution Margin ratio * Increase in sales) - Increase in fixed expenses

    where

    Contribution Margin ratio is 0.6

    Increase in Sales is $75,000

    Increase in fixed expenses is $25,000

    Putting the values above:

    Increase in net operating income = (0.6 * $75,000) - $25,000

    Increase in net operating income = $45,000 - $25,000

    Increase in net operating income = $20,000
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