Question

Data concerning Lemelin Corporation's single product appear below: Per Unit Percent of Sales Selling price $ 230 100 % Variable expenses 115 50 % Contribution margin $ 115 50 % The company is currently selling 7,000 units per month. Fixed expenses are $581,000 per month. The marketing manager would like to cut the selling price by $18 and increase the advertising budget by $37,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 1,600 units. What should be the overall effect on the company's monthly net operating income of this change

Answer 1

Answer:

Overall Net Income=-$7,800

Overall Net income decreases by $7,800

Explanation:

                                        Current                           New (After changes)

Units Selling                   7,000                            7,000+1,600=8600

Sales                       (7000*$230)                         Drop of $18, so S.P=$212

                                  =$1,610,000                       (8,600*212)=$1,823,200      

Variable Exp           (7000*$115)=$805,000         (8,600*115)=$989,000

(AT $115)

Contribution          $1,610,000 -$805,000       $1,823,200-$989,000

Margin                        =$805,000                               =$834,200

Fixed Expense             $581,000                          ($581,000+$37,000)

                                                                                      =$618,000

Net Operating          $805,000-$581,000            $834,200-$618,000

Income                          =$224,000                              =$216,200

Overall Net Income=New Income-Current Income

Overall Net Income=$216,200-$224,000      

Overall Net Income=-$7,800

Overall Net income decreases by $7,800