Question

Kuzio Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $ 130 100 % Variable expenses 78 60 % Contribution margin $ 52 40 % The company is currently selling 6,000 units per month. Fixed expenses are $184,000 per month. The marketing manager believes that a $5,800 increase in the monthly advertising budget would result in a 200 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change

Answer 1

The company's monthly net operating income increases $4,600

Step-by-step explanation:

The company is currently selling 6,000 units per month:

Total sales = $130 x 6,000 = $780,000

Total Variable expenses = $78 x 6,000 = $468,000

Net operating income = Total sales - Total Variable expenses - Fixed expenses = $780,000 - $468,000 - $184,000 = $128,000

If Kuzio Corporation increases in the monthly advertising budget of $5,800:

Total sales = $130 x 6,200 = $806,000

Total Variable expenses = $78 x 6,200 = $483,600

Fixed expenses = $184,000 + $5,800 = $189,800

Net operating income = $806,000 - $483,600 - $189,800 = $132,600

The company's monthly net operating income increases = $132,600 - $128,000 = $4,600