Question

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses are $40.00 per unit, and fixed expenses total $200,000 per year. Its operating results for last year were as follows:

Sales	$	2,240,000
Variable expenses		1,120,000
Contribution margin		1,120,000
Fixed expenses		200,000
Net operating income	$	920,000

The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1.70 per unit. He thinks that this move, combined with some increase in advertising, would increase this year's sales by 25%. How much could the president increase this year's advertising expense and still earn the same $920,000 net operating income as last year?

Answer 1

Sales(35000 units)	$                  28,00,000
Less:Variable expenses(35000*$41.70)	$                  14,59,500
Contribution margin	$                  13,40,500
Let the additional advertising expense as X
Required Net Income	$                    9,20,000
Add:Fixed expenses	$200,000+X
So $920,000 + $200,000 + X =$1,340,500
$1,120,000 + X =$1,340,500
X =$1,340,500 - $1,120,000 =$220,500
So $220,500 is the advertising expenses