Question

1-a. How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $8,400, the monthly sales volume increases by 100 units, and the total monthly sales increase by $9,500? 1-b. Should the advertising budget be increased?

Answer 1

Answer:

a. Income before advertising budget increase:

= Contribution margin - Fixed costs

= (38 * 3,600) - 79,000

= $57,800

Income after advertising budget increases:

= Sales - Variable expenses - Fixed expenses

Sales = (3,600 + 100 units) * 95 per unit

= $351,500

Variable expenses = 60% * 351,500

= $210,900

Fixed expenses = 79,000 + 8,400 advertising

= $87,400

Income = 351,500 - 210,900 - 87,400

= $53,200

b. Income decreased with the increase in advertising so Advertising budget should not be increased.