Question

Data concerning Pellegren Corporation's single product appear below: Fixed expenses are $531,000 per month. The company is currently selling 4,000 units per month. The marketing manager would like to cut the selling price by $14 and increase the advertising budget by $35,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 500 units. What should be the overall effect on the company's monthly net operating income of this change? Select one: a. decrease of $18,000 b. increase of $38,000 c. decrease of $38,000 d. increase of $58,000

Answer 1

Answer:

a. decrease of $18,000

Explanation:

The calculation of overall effect on the company's monthly net operating income is shown below:-

Particulars          Current                  Proposed

Sales               $800,000                 $837,000

                     ($200 × 4,000) (200 - 14) × (4,000 + 500)

Variable

expenses          $160,000               $180,000

                     (40 × 4,000)              (40 × (4,000 + 500))

Contribution

margin              $640,000                $657,000

Fixed

expenses           $531,000                 $566,000

                                               ($531,000 + 350,00)

Net operating

income                  $109,000              $91,000

Decrease in net operating income is

= $109,000 - $91000

= $18,000