Question

Kuzio Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $ 150 100 % Variable expenses 90 60 % Contribution margin $ 60 40 % The company is currently selling 6,500 units per month. Fixed expenses are $193,000 per month. The marketing manager believes that a $5,400 increase in the monthly advertising budget would result in a 120 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?

Answer 1

Overall effect of the change is an increase in net operating income of $1800

Step-by-step explanation:

The net operating income with additional advertising spend is shown below:

Sales (6620*$150) $993,000

Variable expenses(60%*993000) ($595,800)

contribution margin $397,200.

Fixed expenses($193000+$5400) ($198,400)

Net operating income $198,800

The net operating income without additional advertising spend is shown below:

Sales (6500*$150) $975,000

Variable expenses(60%*975,000) ($585,000)

contribution margin $390,000

Fixed expenses ($193,000)

Net operating income $197,000

The overall effect of the change is an increase in net operating income of $1800($198800-$197000)