Blistre Company operates on a contribution margin of 20% and currently has fixed costs of $500,000.Next year,sales are projected to be $3,000,000.An advertising campaign is being evaluated that costs an additional $80,000.How much would sales have to increase to justify the additional expenditure?
A) $320,000
B) $380,000
C) $400,000
D) $600,000

Question

Quizplus · Accepted Answer

First, we need to calculate the current total contribution margin of the company:
Total Contribution Margin = Sales x Contribution Margin Ratio
Total Contribution Margin = $3,000,000 x 20% = $600,000

Next, we need to calculate the company's total costs, including the additional advertising cost:
Total Costs = Fixed Costs + Variable Costs + Advertising Cost
Total Costs = $500,000 + ($3,000,000 x 80%) + $80,000 = $2,260,000

Now, we can calculate the sales required to break even:
Break-Even Sales = Total Costs / Contribution Margin Ratio
Break-Even Sales = $2,260,000 / 20% = $11,300,000

To calculate the sales increase required to justify the additional advertising cost, we can use the following formula:
Sales Increase = Advertising Cost / Contribution Margin Ratio
Sales Increase = $80,000 / 20% = $400,000

Therefore, the answer is C) $400,000.

Blistre Company Operates on a Contribution Margin of 20% and Currently