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Stells [14]
3 years ago
11

The company is currently selling 5,000 units per month. Fixed expenses are $243,000 per month. The marketing manager believes th

at an $11,000 increase in the monthly advertising budget would result in a 180 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?
Business
1 answer:
REY [17]3 years ago
7 0

Answer:

If the company decides to increase its advertising budget, its net profits will  decrease by $200 (= $56,800 - $57,000).

Explanation:

The company is currently selling 5,000 units per month at $150 per unit, and its total variable costs are $90 per unit.

Fixed expenses are $243,000 per month.

Current income statement:

sales revenue =                    $750,000

minus variable costs =         ($450,000)

<u>minus fixed costs =              ($243,000)  </u>

net income =                           $57,000

If the company increases its advertising budget be $11,000 it should sell 180 more units per month, the new income statement would be:

sales revenue =                    $777,000

minus variable costs =         ($466,200)

<u>minus fixed costs =              ($254,000)  </u>

net income =                           $56,800

If the company decides to increase its advertising budget, its net profits will  decrease by $200 (= $56,800 - $57,000).

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