Variable expenses 20,000 advertising be increased with profits remaining unchanged.
Calculation of this year's operating income
Sales 20000*1.25*(20*(1-0.1)) $450,000
Variable expenses 20000*8*1.25 $200,000
Contribution margin $250,000
Fixed expenses 180000+30000 $210,000
Net operating income $40,000
Thus, this year’s net operating income would be $40,000.
Working note
Calculation of units sold last year.
Units sold = Total sales revenue-Sale price per unit =$400,000 - $20 =20,000.
The retail price per unit is reduced by 10%, resulting in a revised retail price of $18 per unit and 20% more units sold. Therefore, the revised sales units would be 25,000, and the total sales for the year would be $450,000, calculated by multiplying the 25,000 units sold by the selling price per unit of $18. Variable expenses increase as the number of units sold improves, so the revised variable cost is the number of units sold multiplied by $8, resulting in a variable cost of $200,000. Variable costs of $200,000 are deducted from sales of $450,000 resulting in a contribution margin of $250,000. Fixed costs increased by $30,000, resulting in revised fixed costs of $210,000 and a net operating income of $40,000. This is calculated as a contribution margin of $250,000 minus fixed costs of $210,000.
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