Chapter 3, Problem 3.35E

Contribution margin, decision making. 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.

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

Required

1. 2. Compute the contribution margin percentage.
2. 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.
3. 4. What other actions can Mr. Welch take to improve operating income?