Question

The sales manager is convinced that a 11% reduction in the selling price, combined with a $70,000 increase in advertising, would increase this year's unit sales by 25%. If the sales manager is right, what would be this year's net operating income if his ideas are implemented?

Answer 1

Incomplete question.

Here's the completed part:

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses are $40.00 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows: Sales $ 2,080,000 Variable expenses 1,040,000 Contribution margin 1,040,000 Fixed expenses 180,000 Net operating income $ 860,000

Required: Answer each question independently based on the original data:

The sales manager is convinced that a 15% reduction in the selling price, combined with a $77,000 increase in advertising, would increase this year's unit sales by 25%.

If the sales manager is right, what would be this year's net operating income if his ideas are implemented?

Answer:

$1,303,000

Explanation:

Note that advertising cost is a variable expense. Increase in unit sales by 25% implies;

New Sales: $2,080,000 + 25% of 2080000= 2080000+520,000= $2,600,000.

Also remember that variable cost increase by $77,000 as a result of advertising expense, implies

Variable expenses: 1,040,000 + 77,000= $1, 117,000.

New Contribution margin= $2,600,000 - $1,117000= $1,483,000.

New Net operating income= New Contribution Margin - Fixed expenses= $1,483,000 - $180,000= $1,303,000.