Question

A company makes a product that sells for $80 per unit. Variable expenses are $40.00 per unit, and fixed expenses total $200,000 per year. Its operating results for last year were as follows: Sales $ 2,080,000 Variable expenses 1,040,000 Contribution margin 1,040,000 Fixed expenses 200,000 Net operating income $ 840,000 The company president wants to add new features to the product, which will increase the variable expenses by $1.90 per unit. She thinks that the new features, combined with some increase in marketing spending, would increase this year's sales by 25%. How much could the president increase this year's fixed marketing expense and still earn the same $840,000 net operating income as last year

Answer 1

Answer:

The president could increase this year's fixed marketing expense and still earn the same $840,000 net operating income as last year if the increase in fixed marketing expense does not exceed in total amount than $198,250.

Explanation:

a) Data and Calculations:

Income Statement         Last Year's         This Year's

Sales                          $ 2,080,000        $2,600,000 ($2,080,000 x 1.25)

Variable expenses        1,040,000             1,361,750 (32,500 x $41.90)

Contribution margin     1,040,000          $1,238,250

Fixed expenses              200,000               398,250 ($198,250)

Net operating income $ 840,000            $840,000