Wertman Corporation produces and sells a single product with the following characteristics: The company is currently selling 3,000 units per month. Fixed expenses are $215,000 per month. Consider each of the following questions independently.
-This question is to be considered independently of all other questions relating to Wertman Corporation. Refer to the original data when answering this question.
The marketing manager believes that a $7,000 increase in the monthly advertising budget would result in a 110 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?

Question

Wertman Corporation produces and sells a single product with the following characteristics:  The company is currently selling 3,000 units per month. Fixed expenses are $215,000 per month. Consider each of the following questions independently.
-This question is to be considered independently of all other questions relating to Wertman Corporation. Refer to the original data when answering this question.
The marketing manager believes that a $7,000 increase in the monthly advertising budget would result in a 110 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?

Quizplus · Accepted Answer

We can use the contribution margin approach to calculate the overall effect on the company's monthly net operating income of the proposed change.

Contribution Margin per Unit = Selling Price per unit - Variable Expenses per unit 
= $58 - $32 
= $26

Contribution Margin Ratio = Contribution Margin per unit / Selling Price per unit 
= $26 / $58 
= 0.4483

With an increase in sales of 110 units per month due to the increased advertising budget, the new monthly sales volume will be:
3,000 + 110 = 3,110 units/month

Total Contribution Margin = Contribution Margin per unit x Sales volume 
= $26 x 3,110 
= $80,860

Total Fixed Expenses = $215,000

Net Operating Income = Total Contribution Margin - Total Fixed Expenses 
= $80,860 - $215,000 
= -$134,140

Therefore, the overall effect of the proposed change will be an increase in net operating income of $2,240 per month ($7,000 + $134,140). Option B is the correct answer.

Wertman Corporation Produces and Sells a Single Product with the Following