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

• Workings

	Current	Planned
Sales	$600,000	$627,200
Variable expenses	$120,000	$134,400
Contribution margin	$480,000	$492,800
Fixed expenses	$354,000	$377,000
Net Income	$126,000	$115,800

	Current	Planned
Sales	=5000*120	=+(5000+600)*(120-8)
Variable expenses	=5000*24	=+(5000+600)*24
Contribution margin	=600000-120000	=627200-134400
Fixed expenses	354000	=354000+23000
Net Income	=480000-354000	=492800-377000

• Requirement

>Overall effect on Company’s net operating income
= Decrease by $ (10,200)

[$115800 – 126000]