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 75 50 % Contribution margin $ 75 50 % The company is currently selling 5,600 units per month. Fixed expenses are $194,000 per month. The marketing manager believes that a $5,300 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:

Net operating income  $8,950

Explanation:

The overall impact on the net operating income is the amount of increase in contribution from the addtional sales less the increase in monthly advertising budget.

                                                         $

Contribution = ($75 × 190) =     14,250

Fixed cost - advertising          ( 5,300)      

Net operating income               8950

Please, note that the fixed costs of $194,000 per month are not relevant for this decision. Simply because they would be incurred either way and that are not completely traceable to the increase sales.