Hammer Company Expects the Following Results for the Next Accounting

question 25

Multiple Choice

Hammer Company expects the following results for the next accounting period: $\begin{array}{lr}\text { Sales } & \$ 240,000 \\\text { Variable costs } & \$ 135,000 \\\text { Fixed costs } & \$ 40,000 \\\text { Expected production and sales in units } & 3,000\end{array}$ The sales manager believes sales could be increased by 400 units if advertising expenditures are increased by $10,000. Suppose advertising expenditures are increased and sales increase by 400 units. What will be the effect on operating income?

• A) a decrease of $4,000
• B) an increase of $4,000
• C) an increase of $22,000
• D) an increase of $30,000

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Definitions:

High-low Method

A method employed in managerial accounting that calculates variable and fixed costs by analyzing the highest and lowest activity levels.

Variable Cost

Variable Cost consists of expenses that vary directly with levels of production or sales volume.

Machine Hour

A machine hour is a unit of measure that represents the operation of a machine for one hour, used in allocating manufacturing costs based on time.

Least-squares Regression

Least-squares regression is a statistical method used to determine the line of best fit by minimizing the sum of squares of the differences between observed and predicted values.