Question

Kuzio Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $ 150 100 % Variable expenses 60 40 % Contribution margin $ 90 60 % The company is currently selling 7,000 units per month. Fixed expenses are $209,000 per month. The marketing manager believes that a $7,100 increase in the monthly advertising budget would result in a 190 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?

Answer 1

Answer:

$10,000 increase in the net operating income

Explanation:

The computation of the overall impact is shown below:

= Change in contribution margin units - increase in the monthly advertising budget

= $17,100 - $7,100

= $10,000

The change in contribution margin units is computed below:

= New sales units × Contribution margin per unit

= 190 units × $90

= $17,100

And, the increase in the monthly advertising budget is a fixed expenses or fixed cost

Sales - variable cost = Contribution

Contribution margin - fixed expenses = Net operating income