Question

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

	Per Unit			Percent of Sales
Selling price	$	100			100	%
Variable expenses		30			30	%
Contribution margin	$	70			70	%

Fixed expenses are $356,000 per month. The company is currently selling 5,100 units per month.

Required:

The marketing manager believes that a $13,000 increase in the monthly advertising budget would result in a 250 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?

Answer 1

Current Sales is 5100 units @ $ 100 per unit. Total sales is 5100 * 100 = $ 510000

Variable expenses is $30 per unit

If company spends $ 13000 on advertising it will be able to generate 250 units extra sale.

So Incremental cost will be Advertising expenses + Variable expenses for 250 units

So total incremental expense will be $13000 + (250 units * $30 per unit) = $20500

Now Incremental Sales From selling 250 units will be 250 * $ 100 per unit = $25000

So net incremental earning will be Total Incremental sale - total Incremental Cost

It will be $ 25000 - $20500 = $ 4500

So overall effect on company's monthly net operating income will be $4500 .

Note - Fixed cost will not change with change in units and hence not considered here.