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5 December, 21:50

A company's manager estimates that in the upcoming year, increasing advertising costs by $25,000 will cause sales revenue to increase by $60,000. If the company's contribution margin ratio is 35%, what will be overall effect on net income? Group of answer choices

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  1. 6 December, 00:45
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    Loss of $4,000 in overall net income

    Explanation:

    Contribution margin is the net of the sale price and variable cost. Contribution margin ratio is the ratio of contribution to sales.

    According to given data

    Sales = $60,000

    Contribution Margin = $60,000 x 35% = $21,000

    Net Income = Contribution margin - Fixed costs = $21,000 - $25,000 = - $4,000

    Advertisement Expense is a fixed cost.

    There will be a loss of $4,000 added to overall net income.
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