Assume the company is considering a reduction in the selling price by $10 per unit and an increase in advertising budget by $5,0
00. This will increase sales volume by 50%.What is the net operating income after the changes?1. $5,0002. $60,0003. $25,0004. $35,000
1 answer:
Answer:
Option (3) is correct.
Explanation:
Given that,
Selling price per unit = $110
Variable cost per unit = $60
Fixed expenses = $30,000
Increase sales volume by 50%
Increase in advertising budget by $5,000
New selling price:
= Selling price per unit - Reduction in selling price per unit
= $110 - $10
= $100
New Fixed expenses:
= Fixed expenses + Increase in advertising budget
= $30,000 + $5,000
= $35,000
Number of units:
= Selling price ÷ Per unit selling price
= $110,000 ÷ $110
= 1,000 units
New sales volume:
= Initial sales volume + Increase in sales volume
= 1,000 units + (1,000 × 50%)
= 1,000 units + 500 units
= 1,500 units
Therefore, the new selling price is as follows:
= New sales volume × Per unit new selling price
= 1,500 × $100
= $150,000
After all these changes,
Contribution margin:
= Selling price - Variable expenses
= $150,000 - (1,500 × $60)
= $150,000 - $90,000
= $60,000
Net operating income:
= Contribution margin - Fixed expenses
= $60,000 - $35,000
= $25,000
Note: Table is missing from the question, so I have attached the required table.
You might be interested in