Question

The sales manager is convinced that a 10% reduction in the selling price, combined with a $30,000 increase in advertising, would increase this year's unit sales by 25%. If the sales manager's ideas are implemented, how much will net operating income increase or decrease over last year

Answer 1

the company's information is missing, so I looked for similar questions:

• budgeted sales $1,000,000
• units sold 10,000
• unit price $100
• total cost per unit $60

currently (without any changes), the company's profit is:

$1,000,000 - (10,000 x $60) = $400,000

if sales price is reduced to $100 x (1 - 10%) = $90

total units sold will increase to 10,000 x (1 + 25%) = 12,500

new operating income = (12,500 x $90) - (12,500 x $60) - $30,000 = $345,000

operating income will decease by $400,000 - $345,000 = $55,000