The Clyde Corporation's variable expenses are 35% 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:
A)$26,250
B)$23,750
C)$1,250
D)$65,000

Question

Quizplus · Accepted Answer

First, we need to calculate the company's current net operating income:
Current Sales = x
Current Variable Expenses = 0.35x
Current Net Operating Income = x - 0.35x = 0.65x

If the company incurs an additional advertising cost of $25,000, the new net operating income becomes:
New Sales = x+ $75,000
New Variable Expenses = 0.35(x+ $75,000)
New Net Operating Income = (x+ $75,000) - 0.35(x+ $75,000) - $25,000
= 0.65x + 0.65($75,000) - $25,000
= 0.65x + $26,250

Therefore, the net operating income will increase by $26,250 if sales increase by $75,000 and the advertising campaign cost $25,000. Hence, B is the correct answer.

The Clyde Corporation's Variable Expenses Are 35% of Sales