To calculate how much net operating income will increase (or decrease) per month, you can use the following formula:
Net Operating Income Change = (Change in Sales) - (Change in Advertising Budget)
Given the information:
- Monthly advertising budget increases by $9,800
- Monthly sales volume increases by 100 units
- Total monthly sales increase by $7,000
Now, let's calculate the change in sales:
Change in Sales = (Change in Sales Volume) x (Change in Sales Price)
Since the sales volume increases by 100 units, and the total monthly sales increase by $7,000, we can calculate the change in sales price as follows:
Change in Sales Price = (Change in Total Sales) / (Change in Sales Volume)
Change in Sales Price = $7,000 / 100 units = $70 per unit
Now, calculate the change in sales:
Change in Sales = 100 units x $70/unit = $7,000
Now, plug these values into the formula:
Net Operating Income Change = $7,000 - $9,800
Net Operating Income Change = -$2,800
So, the net operating income will decrease by $2,800 per month if the monthly advertising budget increases by $9,800, the monthly sales volume increases by 100 units, and the total monthly sales increase by $7,000.
Regarding whether the advertising budget should be increased, this decision should consider various factors such as the impact on profitability, return on investment (ROI), and the overall financial health of the business. If the decrease in net operating income affects profitability negatively, it may not be advisable to increase the advertising budget unless it can be justified by expected future benefits, such as increased sales and profits. The decision should be based on a comprehensive analysis of the business's financial situation and goals.