Question

The sales manager is convinced that a 10% reduction in the selling price, combined with a $30,000 increase in advertising, would increase this year's unit sales by 25%. If the sales manager's ideas are implemented, how much will net operating income increase or decrease over last year? (Negative amounts should be input with a minus sign.)

Answer 1

The net operating income will decrease by $29,990 over last year if the sales manager's ideas are implemented.

Step-by-step explanation:

To determine the increase or decrease in net operating income, we need to calculate the current net operating income and the net operating income after implementing the sales manager's ideas.

Formula to calculate net operating income: Net operating income = Total revenues - Total costs

Let's first calculate the current net operating income:

1. Total revenues = 5 units x $25 per unit = $125
2. Total costs = $130

Current net operating income = $125 - $130 = -$5 (negative $5)

Now, let's calculate the net operating income after implementing the sales manager's ideas:

1. 10% reduction in selling price = 10% x $25 = $2.50
2. New selling price = $25 - $2.50 = $22.50
3. New unit sales = 5 units x 1.25 = 6.25 units (rounded to 6 units)
4. Total revenues = 6 units x $22.50 per unit = $135
5. Total costs = $130 + $30,000 = $30,130
   

New net operating income = $135 - $30,130 = -$29,995 (negative $29,995)

To calculate the increase or decrease in net operating income over last year, we subtract the current net operating income from the new net operating income:

Net operating income increase or decrease = New net operating income - Current net operating income

Net operating income increase or decrease = -$29,995 - (-$5) = -$29,995 + $5 = -$29,990 (negative $29,990)