Question

The company is currently selling 7,000 units per month. Fixed expenses are $214,000 per month. The marketing manager believes that a $7,500 increase in the monthly advertising budget would result in a 190 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 first part of the question is missing, so I searched for similar ones:

sales price per unit = $150

variable costs per unit = $60

contribution margin per unit = $90

currently operating profit = (7,000 x $90) - $214,000 = $416,000

if advertising expenses increase, new operating revenue = (7,190 x $90) - $214,000 - $7,500 = $425,600

operating profit will increase by $425,600 - $416,000 = $9,600