Question

Assume the company is considering a reduction in the selling price by $10 per unit and an increase in advertising budget by $5,000. This will increase sales volume by 50%.
What is the net operating income after the changes?

a. $5,000
b. $60,000
c. $25,000
d. $35,000

Answer 1

Answer:

Net Operating income after change is $25,000

Explanation:

Increase in price will increase the sales value, it will increase the contribution margin as well. Increase in advertisement expense will be added to fixed cost. which will decrease the net profit by $5000. Net effect will be $5000 of profit.

Increase in Price = $110 + $10 = $120

Fixed Cost = $30,000 + $5,000 = $35,000

Sales                              $120,000    1000 units @ $120 100 %  

Variable expenses        $60,000    1000 units @ $60 50 %

Contribution margin      $60,000    1000 units @ $60 50 %

Fixed expenses             $35,000

Net operating income   $25,000

* Data for the question was missing following data has been used from the similar question

Selling price                  $110,000    1000 units @ $110 100 %  

Variable expenses        $60,000    1000 units @ $60 55 %

Contribution margin      $50,000    1000 units @ $50 45 %

Fixed expenses             $30,000

Net operating income   $ 20,000