Question

Taylor Company has current sales of 1,000 units, which generates sales revenue of $190,000, variable costs of $76,000 and fixed expenses of $96,000. The company believes sales will increase by 300 units, if advertising increases by $20,000. What is the change in net operating income after the changes?

Answer 1

Answer:

The change in net operating income after the changes by $14,200

Explanation:

For computing the change in net operating income, first, we have to compute the contribution per unit which is shown below:

Contribution per unit = Selling per unit - variable cost per unit

                                   = $190 per unit - $76 per unit

                                   =  $114 per unit

where,

The selling per unit = (Sales revenue ÷ number of units)

                                = ($190,000 ÷ 1,000 units)

                                = $190 per unit

The variable cost per unit = (variable cost ÷ number of units)

                                           = ($76,000 ÷ 1,000 units)

                                           = $76 per unit

Now the change in operating income equals to

= (increased sales units × contribution per unit) - advertising cost

= (300 units × $114 per unit) - $20,000

= $34,200 -$20,000

= $14,200 increase