This question is to be considered independently of all other questions relating to Marchman Corporation. Refer to the original data when answering this question.
-The marketing manager would like to cut the selling price by $7 and increase the advertising budget by $11,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 800 units. What should be the overall effect on the company's monthly net operating income of this change?
A)increase of $21,800
B)decrease of $21,800
C)increase of $79,400
D)decrease of $6,200

Question

Quizplus · Accepted Answer

To calculate the effect on net operating income, we need to use the contribution margin per unit, which is $48 ($80 selling price - $32 variable cost).

By reducing the selling price by $7, the new selling price would be $73, resulting in a new contribution margin per unit of $41.

By increasing the advertising budget, monthly fixed costs would increase by $11,000.

With an increase in sales by 800 units, the total contribution margin would increase by $32,800 ($41 contribution margin per unit x 800 unit increase in sales).

However, the increase in fixed costs by $11,000 would result in a decrease in net operating income of $6,200 ($32,800 increase in contribution margin - $11,000 increase in fixed costs - $21,800 decrease in selling price).

Therefore, the overall effect on the company's monthly net operating income would be a decrease of $6,200.

This Question Is to Be Considered Independently of All Other