Question

Statfeld Company's income statement for the current month shows that the company sold 300,000 units of its product and earned a net operating income of $450,000, Management is very pleased with the result and believes the company's financial position is strong because sales would have to go down by 40% from the current level before losses would occur. Management further believes that if the company runs a new TV commercial at a cost of $50,000 per month, sales volume next month could grow by 20% from the current sales level without the need to lower the sales price. If this action is taken, what will be the increase decrease in the next month's net operating income from the current month?

a. Increase of $175,000
b. Increase of $40,000
c. Increase of $225,000
d. Decrease by $50,000
e. None of the above.

Answer 1

b. Increase of $40,000

Step-by-step explanation:

Incremental Analysis of the Operating Profit arising from new TV commercial

Hint : Consider Incremental amounts Only

Operating Income ( $450,000 × 20 %) $90,000

Less Cost of new TV commercial ($50,000)

Incremental Income / (loss) $40,000

Conclusion :

There will be an increase in next month's net operating income from the current month of $40,000 .