Question

Thornbrough Corporation produces and sells a single product with the following characteristics: Per Unit Percent of Sales Selling price $ 220 100 % Variable expenses 44 20 % Contribution margin $ 176 80 % The company is currently selling 7,000 units per month. Fixed expenses are $901,000 per month. The marketing manager would like to cut the selling price by $18 and increase the advertising budget by $53,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 1,000 units. What should be the overall effect on the company's monthly net operating income of this change

Answer 1

Answer:

The income will decrease by $21,000

Explanation:

Giving the following information:

Selling price $ 220

Variable expenses 44

Contribution margin $ 176

Sales in units= 7,000

Total contribution margin= 7,000*176= $1,232,000

Fixed expenses= ($901,000)

Net operating income= 331,000

Now, with the changes we calculate the new net operating income:

New sales price= $202

New fixed cost= (53,000 + 901,000)= 954,000

New unit sales= 8,000

Net operating income= 8,000*(202 - 44) - 954,000= $310,000

The income will decrease by $21,000