Question

Data concerning Pellegren Corporation's single product appear below: Fixed expenses are $531,000 per month. The company is currently selling 4,000 units per month. The marketing manager would like to cut the selling price by $14 and increase the advertising budget by $35,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 500 units. What should be the overall effect on the company's monthly net operating income of this change

Answer 1

Answer and Explanation:        

Particulars          Current                    Expected

Sales                $800,000           $837000

                         ($200 × 4,000)             ($200 - $14) × (4,000 + 500)

Less:

Variable expenses  $160,000            $180,000

                          ($40 × 4,000)                  ($40 × 4,500)    

Contribution margin $640,000 $657,000

Less:  

Fixed expenses    $531,000               $566,000

                                                           ($531,000 + $35,000)

Net operating income  $109,000               $91,000

As we can see that the net operating income is declined by $18,000 by taking a difference of current net operating income and expected net operating income