Incomplete question.
Here's the completed part:
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses are $40.00 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows: Sales $ 2,080,000 Variable expenses 1,040,000 Contribution margin 1,040,000 Fixed expenses 180,000 Net operating income $ 860,000
Required: Answer each question independently based on the original data:
The sales manager is convinced that a 15% reduction in the selling price, combined with a $77,000 increase in advertising, would increase this year's unit sales by 25%.
If the sales manager is right, what would be this year's net operating income if his ideas are implemented?
Answer:
$1,303,000
Step-by-step explanation:
Note that advertising cost is a variable expense. Increase in unit sales by 25% implies;
New Sales: $2,080,000 + 25% of 2080000= 2080000+520,000= $2,600,000.
Also remember that variable cost increase by $77,000 as a result of advertising expense, implies
Variable expenses: 1,040,000 + 77,000= $1, 117,000.
New Contribution margin= $2,600,000 - $1,117000= $1,483,000.
New Net operating income= New Contribution Margin - Fixed expenses= $1,483,000 - $180,000= $1,303,000.