A company sells 100,000 units at a price of $10 per unit.
Variable cost per unit is $6, giving a $4 contribution margin per unit.
Current fixed costs (including marketing) total $250,000.

The company wants to achieve a target profit of $200,000.

Marketing proposes a new fixed advertising campaign costing $80,000, which is expected to increase sales volume by 30,000 units.

Which statement best explains whether the company should add the $80,000 fixed marketing spend to reach the target profit?

Question

A company sells 100,000 units at a price of $10 per unit.
Variable cost per unit is $6, giving a $4 contribution margin per unit.
Current fixed costs (including marketing) total $250,000.

The company wants to achieve a target profit of $200,000.

Marketing proposes a new fixed advertising campaign costing $80,000, which is expected to increase sales volume by 30,000 units.

Which statement best explains whether the company should add the $80,000 fixed marketing spend to reach the target profit?

BlackTom AI · Accepted Answer

Question restatement: A company sells 100,000 units at $10 each. Variable cost per unit is $6, giving a $4 contribution margin per unit. Fixed costs currently are $250,000. The target profit is $200,000. A new fixed advertising campaign costing $80,000 is proposed, which is expected to increase sales by 30,000 units. Which statement best explains whether the company should add the $80,000 fixed marketing spend to reach the target profit?

Option 1: 'Yes, but only if variable costs decrease, because fixed marketing costs never contribute to target-profit achievement unless the contribution margin per unit rises.'
- Why this is not correct: The plan relies on the existing contribution margin per unit (not a change in variable costs) and the fixed cost increase; it does not require variable costs to drop. The statement incorrectly asserts fixed marketing costs never help toward target-profit unless variable costs fall, which misreads the mechanics: fixed costs can be justified if the incremental contribution from the volume increase exceeds them. Here, we should quantify the incremental effect rather than assert a prerequisite about variable costs changing.

Option 2: 'No. Because contribution margin is unchanged, any increase in fixed costs will always prevent the company from achieving its target profit.'
- Why this is not correct: The contribution margin per unit indeed remains $4, but the total contribution margin changes with volume. The assertion that CM is unchanged is a misunderstanding: CM total increases with higher volume (4 dollars per additional unit times the additional units). Therefore, fixed costs can be offset by the extra CM from the higher sales. This option incorrectly treats CM as unchanged and makes an absolute statement about always failing, which ignores the actual numbers.

Option 3: 'No. Increasing fixed marketing costs reduces profit mechanically, so the company should cut fixed costs instead of increasing them.'
- Why this is a reasonable critique: Calculating the impact shows that adding $80,000 of fixed costs, along with 30,000 extra units at a $4 CM, yields an incremental CM of $120,000 but only reduces the incremental profit by the fixed cost increase, giving a net incremental effect of $120,000 − $80,000 = $40,000. Relative to the baseline profit of $150,000, this plan would lead to $190,000 total profit, which is still short of the $200,000 target by $10,000. Thus, from a pure target-profit perspective, the move does not achieve the goal. The statement captures the idea that the fixed cost increase does not fully help reach the target and questions whether the spend is worth it. It aligns with the numerical outcome and suggests re-evaluating fixed costs rather than assuming a benefit.

Option 4: 'Yes. The added 30,000 units generate $120,000 in additional contribution margin, which more than covers the $80,000 fixed marketing spend and helps reach the target profit.'
- Why this is not correct: While the calculation of incremental CM from the extra units is $120,000 and it does exceed the $80,000 fixed cost increase, the overall profit after the plan is still below the target. Baseline profit was $150,000; adding the incremental CM of $120,000 and deducting the $80,000 fixed cost raises profit to $190,000, not $200,000. Therefore, the plan does not actually reach the target profit, making this statement overly optimistic and numerically incorrect with respect to the target.

Summary view across options: The core issue is whether the incremental CM from the increased volume plus the impact of the new fixed cost achieves the target profit. The correct line of reasoning shows that the plan yields a net incremental profit of $40,000 over the baseline, bringing total profit to $190,000, which still misses the $200,000 target. Among the choices, option 3 presents a plausible cautions about fixed-cost increases and aligns with the conclusion that the target is not reached, whereas the other options either misstate the effect of CM, misrepresent the impact of fixed costs, or claim target attainment that isn’t supported by the math.

2025FA_IMC_402-0_SEC20 Final Exam

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