Shown below are responsibility income statements for Sotheby, Inc., for the month of June.

Instructions
a. The company plans to initiate an advertising campaign for one of the two products in Division 1. The campaign would cost $8,000 per month and is expected to increase the sales of whichever product is advertised by $25,000 per month. Compute the expected increase in the responsibility margin of Division 1 assuming
(1) That product C is advertised, and
(2) That product D is advertised.
b. Assume that the sales of both products by Division 1 are equal to total manufacturing capacity.
To increase sales of either product, the company must increase manufacturing facilities, which means an increase in traceable fixed costs in approximate proportion to the expected increase in sales. In this case, which product line would you recommend expanding? Explain.
c. The income statement for Division 1 includes $20,000 in common fixed costs. What happens to these fixed costs in the income statements for Sotheby, Inc.?
d. Assume that in November the monthly sales in Division 2 increase to $200,000. Prepare an income statement for Sotheby, Inc., by division in the format illustrated above. What is the expected effect of this change on the operating income of thecompany?

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Investment Centers Division1 Sotheby, Inc Dollars % Division 2 Dollars Dollars Sales-. Variable costs Contribution margin Fixed costs traceable to $500,000 100% $340,000 100% $160,000 100% 238,000 70 $198,000 40% $102,000 30% $96,000 60% 302,000 60 64,000 40 divisions 132,000 26 68,000 20 64,000 40 Division responsibility margin Common fixed costs Income from operations .. $66,000 13% $34,000 10% $32,000 20% 46,000 9 $20,000 4% Profit Centers Division 1 Product C Product D Dollars Dollars Dollars $220,000 50% $42,000 20,000 Sales .. $340,000 100% $120,000 100% 100% 238,000 70 60,00050 178,000 8 Contribution margin Fixed costs traceable to $102,000 30% $60,000 19% 48,000 14 products Product responsibility 28,000 23 $54,000 1896 $ 32,000 27% $22.000 10% margin Common fixed costs.. Responsibility margin for 20,000 6 division - $34,000 10%