Arrow Products typically earns a contribution margin ratio of 25 percent and has current fixed costs of $80,000. Arrow’s general manager is considering
spending an additional $20,000 to do one of the following:
| 1. |
Start a new ad campaign that is expected to increase sales revenue by 5 percent. |
| 2. |
License a new computerized ordering system that is expected to increase Arrow’s contribution margin ratio to 30 percent. |
|
Sales revenue for the coming year was initially forecast to equal $1,200,000 (that is, without implementing either of the above options). |
| a-1 |
Compute the projected operating income for each option? (Omit the “$” sign in your response.) |
| Operating income | |
| Ad Campaign | $ |
| Ordering System | $ |
|
|
|
| a-2 |
For each option, how much will projected operating income increase or decrease relative to initial predictions? |
|
Thus projected operating income will by $ if the ad campaign is chosen. |
|
Thus projected operating income will by $ if the ordering system is chosen. |
| b. |
By what percentage would sales revenue need to increase to make the ad campaign as attractive as the ordering system? (Omit |
| Percentage increase | % |
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