Question

TIMED QUIZ

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

	Per Unit			Percent of Sales
Selling price	$	130			100	%
Variable expenses		78			60	%
Contribution margin	$	52			40	%

The company is currently selling 6,800 units per month. Fixed expenses are $180,000 per month. The marketing manager believes that a $8,000 increase in the monthly advertising budget would result in a 200 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?

Answer 1

Answer:

Net operating Income before changes

Fixed cost = $180,000

Sales units = 6,800 units

	Income Statement before changes
	Particulars	Amount
A	Sales (6,800 units * $130 per unit)	$884,000
B	Less: Cost of goods sold (6,800 * $78)	($530,400)
C	Contribution Margin (A - B)	$353,600
D	Less: Fixed costs	($180,000)
E	Net Operating Income (C - D)	$173,600

Net operating Income after changes

Revised Fixed cost = $180,000 + $8,000 = $188,000

Revised Sales units = 6,800 units + 200 units = 7,000 units

	Income Statement after changes
	Particulars	Amount
A	Sales (7,000 units * $130 per unit)	$910,000
B	Less: Cost of goods sold (7,000 * $78)	($546,000)
C	Contribution Margin (A - B)	$364,000
D	Less: Fixed costs	($188,000)
E	Net Operating Income (C - D)	$176,000

The overall effect on the company's monthly net operating income of this change = $176,000 - $173,600 = $2,400

There is an increase in Net operating Income by $2,400.