Wilson Company prepared the following preliminary budget assuming no advertising expenditures: $$\begin{array} { | l | l | }
\hline \text { Selling price } & \$ 10 \text { per unit } \
\hline \text { Unit sales } & 100,000 \
\hline \text { Variable expenses } & \$ 600,000 \
\hline \text { Fixed expenses } & \$ 300,000 \
\hline
\end{array}$$ Based on a market study, the company estimated that it could increase the unit selling price by 15% and increase the unit sales volume by 10% if $100,000 were spent on advertising. Assuming that these changes are incorporated in its budget, what should be the budgeted net income?

Question

Wilson Company prepared the following preliminary budget assuming no advertising expenditures: $$\begin{array} { | l | l | } 
\hline \text { Selling price } & \$ 10 \text { per unit } \
\hline \text { Unit sales } & 100,000 \
\hline \text { Variable expenses } & \$ 600,000 \
\hline \text { Fixed expenses } & \$ 300,000 \
\hline
\end{array}$$ Based on a market study, the company estimated that it could increase the unit selling price by 15% and increase the unit sales volume by 10% if $100,000 were spent on advertising. Assuming that these changes are incorporated in its budget, what should be the budgeted net income?

Quizplus · Accepted Answer

With advertising, the selling price per unit increases by 15% to $11.50 ($10 * 1.15), and unit sales increase by 10% to 110,000 units. The new revenue is $1,265,000 ($11.50 * 110,000). Variable expenses, assuming they remain a constant per unit, increase to $660,000 ($600,000 * 1.10). Fixed expenses, including the $100,000 advertising cost, total $400,000 ($300,000 + $100,000). The budgeted net income is calculated as revenue minus variable expenses minus fixed expenses: $1,265,000 - $660,000 - $400,000 = $205,000.

Wilson Company Prepared the Following Preliminary Budget Assuming No Advertising