Gross margin and contribution margin, making decisions. Schmidt Men’s Clothing’s revenues and cost data for 2007 appears below.

Revenues $600,000 Cost of goods sold (40% ofsales) 240,000 Gross margin 360,000 Operating costs:

Salaries and wages $180,000 Sales commissions (10% ofsales) 60,000 Amortization of equipment and fixtures 14,400 Store rent ($4,800 per month) 57,600 Other operating costs 60,000 372,000 Operating income (loss) $(12,000)

Mr. Schmidt, the owner ofthe store, is unhappy with the operating results. An analysis of other operating costs reveals that it includes $48,000 variable costs, which vary with sales volume, and

$12,000 fixed costs.

Required:

1. Compute the contribution margin of $chmidt Men’s Clothing.

2. Compute the contribution margin percentage.

3. Mr. Schmidt estimates he can increase revenues by 20% by incurring additional advertis¬

ing costs of $12,000. Calculate the impact on operating income of this action.