Question

A company distributes a product that sells for $50 per unit. Variable expenses are $10 per unit, and fixed expenses total $15,000 annually. Assume that the company sold 4,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a $30,000 increase in advertising expenditures, would increase annual unit sales by 50%. If these changes were made, by how much would net operating income increase or decrease?

Answer 1

Income will increase by $20,000.

Step-by-step explanation:

First, we need to calculate the current income:

Current income= 4,000*(50 - 10) - 15,000= $145,000

Now, the new selling price, fixed costs, and sales in units:

Selling price= 50*0.9= $45

Fixed costs= $45,000

Sales= 4,000*1.5= 6,000

New income= 6,000*(45 - 10) - 45,000= $165,000

Difference= 165,000 - 145,000= 20,000

Income will increase by $20,000.