Assume that Andretti Company has sufficient capacity to produce 120,150 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 35% above the present 89,000 units each year if it were willing to increase the fixed selling expenses by $140,000. What is the financial advantage (disadvantage) of investing an additional $140,000 in fixed selling expenses?

Question

Olive

Business

19 September, 16:13

Assume that Andretti Company has sufficient capacity to produce 120,150 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 35% above the present 89,000 units each year if it were willing to increase the fixed selling expenses by $140,000. What is the financial advantage (disadvantage) of investing an additional $140,000 in fixed selling expenses?

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Gordon Flowers · Answer 1

The company will have financial advantage as it is able to generate more revenue then earlier. The company can benefit from increase of fixed selling expense by selling more units and generating more profits.

Explanation:

If Andretti company produces and sells 89,000 daks at $44 per dak then it can generate revenue of $3,916,000.

If the company increases the selling expense it can increase the sales by 35% above the current level of 89,000, the company can sell 120,150 units at $44 per unit which generates the revenue of $5,286,600. There will be additional selling expense of $140,000. The net gain to the Andretti company after the increase of sales will be 5,146,000 ($5,286,600 - $140,000).

There is net gain to to company of $1,230,000 ($5,286,600 - $3,916,000)