Laro Corporation produces and sells a single product with the following characteristics:The company is currently selling 5,000 units per month. Fixed expenses are $302,000 per month. Consider each of the following questions independently.
-This question is to be considered independently of all other questions relating to Laro Corporation.Refer to the original data when answering this question. The marketing manager would like to cut the selling price by $13 and increase the advertising budget by $17,000 per month.The marketing manager predicts that these two changes would increase monthly sales by 1,200 units.What should be the overall effect on the company's monthly net operating income of this change?

Question

Quizplus · Accepted Answer

To determine the overall effect of the change, we need to calculate the change in contribution margin and subtract the increase in advertising expense.

Decrease in selling price: $13 × 15,000 units = $195,000 decrease in revenue 
Increase in advertising budget: $17,000 increase in advertising expense 
Expected increase in sales: 1,200 units × $150 selling price = $180,000 increase in revenue

Overall, we expect a decrease in contribution margin of $15,000 ($195,000 decrease in revenue - $180,000 increase in revenue).

Therefore, the overall effect on the company's monthly net operating income is a decrease of $7,600 ($15,000 decrease in contribution margin - $17,000 increase in advertising expense).

Laro Corporation Produces and Sells a Single Product with the Following