Question

Fixed expenses are $499,000 per month. The company is currently selling 5,000 units per month. The marketing manager would like to cut the selling price by $13 and increase the advertising budget by $33,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 900 units. What should be the overall effect on the company's monthly net operating income of this change?

A) increase of $56,100B) decrease of $8,900C) increase of $99,300D) decrease of $56,100

Answer 1

Decrease of
`\$8,900` should be the overall effect on the company's monthly net operating income of this change.

Option-B

Solution:

The sales add up to a cumulative of
`\$800`, eight hundred dollars
`(5000 \ units* \$160; \ 5900 \ units* \$147)`

Variable expenses being 240,000 and Contribution type being margin being 560,000 (five hundred thousand sixty thousand);

Fixed expenses add up to a cumulative of an approximate 499,000 (four hundred thousand nine hundred and ninety nine)

Net operating income would be
`\$61,000` (sixty one thousand) and the decrease would be
`\$8,900`.