Welch Men's Clothing's revenues and cost data for 2017 are as follows:

Revenues............................................................................................$600,000

Cost of goods sold (all variable costs) ..............................................300,000

Gross margin.......................................................................................300,000

Operating costs:

Salaries fixed......................................................................................$140,000

Sales commissions (12% of sales) .......................................................72,000

Depreciation of equipment and fixtures.............................................10,000

Store rent ($3,500 per month) .............................................................42,000

Other operating costs 45,000.............................................................309,000

Operating income (loss) ......................................................................$(9,000)

Mr. Welch, the owner of the store, is unhappy with the operating results. An analysis of other operating costs reveals that it includes $30,000 variable costs, which vary with sales volume, and $15,000 (fixed) costs.

Required

1. Compute the contribution margin of Welch Men's Clothing.

2. Compute the contribution margin percentage.

3. Mr. Welch estimates that he can increase units sold, and hence revenues by 25% by incurring additional advertising costs of $8,000. Calculate the impact of the additional advertising costs on operating income.

4. What other actions can Mr. Welch take to improve operating income?