Question

Weinreich Corporation produces and sells a single product. Data concerning that product appear below:

1.selling price per unit- $180 = 100% of sales

2.Variable expenses - 90 = 50% of sales

3.contribution margin- $90 = 50% of sales


The company is currently selling 2,000 units per month. Fixed expenses are $131,000 per month. The marketing manager believes that an $18,000 increase in the monthly advertising budget would result in a 170 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?

A. increase of $2,700

B. increase of $15,300

C. decrease of $18,000

D. decrease of $2,700

Answer 1

Option (D): Decrease of $2,700

Explanation :

As per the data given in the question,

1) Net operating income without change:

1. Sales (2,000 units × $180) $360,000

2. Less: Variable expenses (2,000 units × $90) $180,000

3. Contribution ($36,000 - $180,000) $180,000

4. Less: Fixed cost $131,000

5. Net operating income ($180,000 - $131,000) $49,000

2) Net operating income with change:

1. Net operating income without change $49,000

2. Less: Advertising expenses to increase in sale $18,000

3. Add: Sales value for extra 170 units (170 × $180) $30,600

4. Less: Variable expenses for 170 units (170 × $90) $15,300

5. Net operating income after change $46,300

($49,000-$18,000+$30,600-$15,300)

From the above tables we can conclude, there is decrease of $2,700 which is not advisable.