Question

Selling price $ 110,000 $ 110 100 % Variable expenses 60,000 60 55 % Contribution margin 50,000 $ 50 45 % Fixed expenses 30,000 Net operating income $ 20,000 Knowledge Check 01 Assume the company is considering a reduction in the selling price by $10 per unit and an increase in advertising budget by $5,000. This will increase sales volume by 50%. What is the net operating income after the changes?

Answer 1

Answer:

Increase in income= $5,000

Explanation:

Giving the following information:

Selling price $ 110,000 ($110)

Variable expenses 60,000 ($60)

Contribution margin 50,000 ($50)

Fixed expenses 30,000

Net operating income $ 20,000

The company is considering a reduction in the selling price by $10 per unit and an increase in the advertising budget by $5,000.  This will increase sales volume by 50%.

Increase in income= unitary contribution margin* sales in units - new fixed costs

New Income= 40* (1000*1.5) - 35,000= 25,000

Increase in income= $5,000