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Shown below is the current monthly income statement of Metro Video, by profit centers: METRO VIDEO Income Statement by Profit Centers For the Month Ended April 30, 20 __ On the basis of this information, compute the increase in monthly income from operations that may be expected to result from each of the following actions: (a) Spending $5,000 per month in advertising is expected to increase sales in the Equipment Sales Department by 35%. $ _________ (b) Closing the Equipment Sales Department and allowing the Video Rentals Department to expand is expected to increase the revenue of the Video Rentals Department by S105,000 per month. This action also is expected to increase fixed costs traceable to the Video Rentals Department by $40,000 per month. $ ________
Expert Answer
| Statementshowing Computations | ||
| Paticulars | Amount | |
| Sales of equipment deptt | 280,000.00 | |
| Contribution margin | 81,200.00 | |
| CM Ratio = 81200/280000 | 29.00% | |
| a) | ||
| Increase in Sales = 280000 * .35 | 98,000.00 | |
| Contribution fromincreased sales= 98000 *.29 | 28,420.00 | |
| Less advertising costs | 5,000.00 | |
| Increase in income | 23,420.00 | |
| b) | Sales Depp | Video Rental Deptt |
| Sales | 280,000.00 | 280,000.00 |
| Contribution margin | 81,200.00 | 210,000.00 |
| CM Ratio | 29.00% | 75.00% |
| Increase in sales of video deptt | 105,000.00 | |
| Contribution fro video deptt= 105000 * .75 | 78,750.00 | |
| Contribution lost of Equipment Sales deptt | (81,200.00) | |
| Savings of FC of Equipment Deptt | 25,200.00 | |
| Extra FC incurred in Video deptt | (40,000.00) | |
| Net income (Loss) = 78750 + 25200 – 81200 -40000 | (17,250.00) | |
