Question
A retailer uses flexible budgeting as a planning tool. The companys original budget for the upcoming year is shown below. Sales $90,000,000 Cost of goods
A retailer uses flexible budgeting as a planning tool. The companys original budget for the upcoming year is shown below. Sales $90,000,000 Cost of goods sold 36,000,000 Administrative expenses (all fixed) 21,000,000 Advertising expense 9,000,000 Sales commissions 6,750,000 Other marketing expenses (all fixed) 9,250,000 Operating income $ 8,000,000 The manager of the retailers Marketing Department believes sales volume will increase by 10% if the advertising budget is increased by $5,000,000. Should the retailer approve the increased advertising request? A. Yes, because the increase in sales is $4,000,000 greater than the increase in advertising costs. B. No, because advertising is 10% of sales, so the maximum increase in sales would be $900,000. C. Yes, because operating income would increase by $400,000. D. No, because operating income would decrease by $275,000.
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