Question

Montgomery Corporation produces and sells a single product. Data concerning that product appear: Selling price ------------...

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

Selling price ------------ $240 per unit

Variable expenses -----    144

Contribution margin ---    $96

Fixed expenses are $239,000 per month. The company is currently selling 3,000 units per month. The marketing manager would like to cut the selling price by $12 and increase the advertising budget by $12,000 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?

a.

increase of $102,000.
b.

decrease of $30,000.
c.

decrease of $6,000.
d.

increase of $30,000.
Business   Accounting   
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Answer #1
Budgets at
Ans. Particulars 3,000 units 3,500 units
Sales       720,000       798,000
Less: Variable Cost       432,000       504,000
      Contribution Margin       288,000       294,000
Less: Fixed Expenses       239,000       251,000
      Net operating Income $ 49,000 $ 43,000
Hence, net operating income will decrease by $6,000 after overall effects.
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