Trendy Co. produced and sold 30,000 backpacks during the last year at an average price of $25 per unit. Unit variable costs were the following:
Variable manufacturing costs $ 9
Variable selling and administrative costs 6
—
Total $15
Total fixed costs were $250,000. There was no year-end work-in-process inventory. If Trendy had spent an additional $15,000 on advertising, then sales would have increased by $30,000. If Trendy had made this investment, what change would have occurred in Trendy's pretax profit?
A. $3,000 increase
B. $4,200 increase
C. $3,000 decrease
D. $4,200 decrease
Ans: C
Contribution margin per unit was $10 ($25 sales price less variable costs of $9 and $6). The contribution margin ratio was 40% ($10 contribution per unit divided by $25 sales revenue per unit).
Additional sales of $30,000 would have increased the contribution margin by $12,000 ($30,000 × 0.40). The increased contribution margin of $12,000 fails to cover the advertising costs of $15,000, leaving a decrease of $3,000 in pretax profit.
I can understand this explanation but I always just want to add the $30,000 increase to profit and $15,000 advertising to expenses, making an increase in profit of $15,000: (750,000 – 700,000) – (780,000 – 715,000). How can I get the right way of computing this through my head?
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