Question

The company is currently selling 5,000 units per month. Fixed expenses are $243,000 per month. The marketing manager believes that 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?
Per Unit Price Percent of sales

selling prices $150 100%

variable exp 90 60%

cont margin 60 40%


(A) increase of $200

(B) decrease of $200

(C) increase of $10,800

(D) decrease of $11,000

Answer 1

Answer:

(B) decrease of $200

Explanation:

As for the information provided,

Current net income = Contribution - Fixed cost

Contribution = $60 $\times$ 5,000 = $300,000

Fixed cost = $243,000

Thus, net income = $57,000 = $300,000 - $243,000

Now after the revised advertisement plan

Fixed cost = $243,000 + $11,000 = $254,000

Then contribution = $60 $\times$ 5,180 = $310,800

Net income = $310,800 - $254,000 = $56,800

The difference in old and new income = $57,000 - $56,800 = $200 decrease.

Therefore, correct option is:

Option B