Detailed Answer
Answer (A) is correct.
If sales units increased by 5%, sales revenue would increase by
$375,000. Cost of goods sold would also increase by 5% (an increase of
$187,500). The net increase in operating income is $162,500
($375,000 increase in revenue – $187,500 increase in cost of goods sold
– $25,000 increase in advertising expense). The new sales amount is
$7,875,000 ($7,500,000 + $375,000), and the new operating income is
$787,500 ($625,000 + $162,500). Operating income as a percentage of
sales revenue is 10%, which meets the company’s long-term goal.