Question

Bethard Corporation produces and sells a single product. Data concerning that product appear below:

• Selling price $120 per unit
• Variable expenses 24 per unit
• Contribution margin $96 per unit

Fixed expenses are $354,000 per month. The company is currently selling 5,000 units per month.

Required:

The marketing manager would like to cut the selling price by $8 and increase the advertising budget by $23,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 600 units. What should be the overall effect on the company's monthly net operating income of this change?

Answer 1

Calculation of overall effect on the company's monthly net operating income:

Particulars	Amount($)
New Total Contribution Margin (5600 units x $88 per unit)	$492800
Present Total Contribution Margin (5000 units x $96 per unit)	480000
Change in Total Contribution Margin	12800
Less: Increase in Advertising Budget	23000
Change in Net operating income	($10200)

Working notes:

1) New selling price ($120 - $8) = $112

2) New Contribution Margin ($112 - $24) = $88

3) Calculation of unit monthly sales:

New Unit Monthly Sales (5000 units + 600 units) = 5600 units

Please rate, Thanks.