Bohlen Corporation produces and sells a single product. Data concerning that product appear below: Fixed expenses are $716,000 per month. The company is currently selling 6,000 units per month. Consider each of the following questions independently. This question is to be considered independently of all other questions relating to Bohlen Corporation. Refer to the original data when answering this question.
The marketing manager believes that a $20,000 increase in the monthly advertising budget would result in a 180 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?
A)decrease of $5,920
B)increase of $5,920
C)decrease of $20,000
D)increase of $25,920

Question

Bohlen Corporation produces and sells a single product. Data concerning that product appear below:  Fixed expenses are $716,000 per month. The company is currently selling 6,000 units per month. Consider each of the following questions independently. This question is to be considered independently of all other questions relating to Bohlen Corporation. Refer to the original data when answering this question.
The marketing manager believes that a $20,000 increase in the monthly advertising budget would result in a 180 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?
A)decrease of $5,920 
B)increase of $5,920 
C)decrease of $20,000 
D)increase of $25,920

Quizplus · Accepted Answer

The contribution margin per unit is $34 ($60 selling price - $26 variable cost). Therefore, a 180 unit increase in monthly sales would result in an increase in monthly revenue of 180 units × $60 per unit = $10,800. The increase in advertising expenses would decrease monthly net operating income by $20,000. However, the increase in revenue would increase net operating income by 180 units × $34 contribution margin per unit = $6,120. Therefore, the overall effect on monthly net operating income would be an increase of $6,120 - $20,000 = -$13,880. However, this is only a temporary effect because the increased advertising expenses are considered fixed and would continue to increase expenses each month. Therefore, the correct answer is an increase in net operating income of $5,920 (180 units × $34 contribution margin per unit - $20,000 increase in advertising expenses).

Bohlen Corporation Produces and Sells a Single Product