Question

The company is currently selling 5,000 units per month. Fixed expenses are $243,000 per month. The marketing manager believes that an $11,000 increase in the monthly advertising budget would result in a 180 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?

Answer 1

If the company decides to increase its advertising budget, its net profits will decrease by $200 (= $56,800 - $57,000).

Step-by-step explanation:

The company is currently selling 5,000 units per month at $150 per unit, and its total variable costs are $90 per unit.

Fixed expenses are $243,000 per month.

Current income statement:

sales revenue = $750,000

minus variable costs = ($450,000)

minus fixed costs = ($243,000)

net income = $57,000

If the company increases its advertising budget be $11,000 it should sell 180 more units per month, the new income statement would be:

sales revenue = $777,000

minus variable costs = ($466,200)

minus fixed costs = ($254,000)

net income = $56,800

If the company decides to increase its advertising budget, its net profits will decrease by $200 (= $56,800 - $57,000).