Detailed Answer
Answer (A) is correct.
Return on sales is equal to operating income divided by sales. For every
dollar added to sales, 45% will be the cost of goods sold ($20,700,000 ÷
$46,000,000), and 5% will be sales commissions. Therefore, for every
dollar that is added to sales, $.50 is added to operating income. To find
how much the sales budget must be increased by to raise the return on
sales to 15%, algebra is the most appropriate tool, as follows:
[($5,500,000 + .5X) ÷ ($46,000,000 + X)] = .15
($5,500,000 + .5X) = .15 × ($46,000,000 + X)
$5,500,000 + .5X = $6,900,000 + .15X
.35X = $1,400,000
X = $4,000,000