Data concerning Sotero Corporation's single product appear below: The company is currently selling 5,000 units per month. Fixed expenses are $319,000 per month. Consider each of the following questions independently.
-This question is to be considered independently of all other questions relating to Sotero Corporation. Refer to the original data when answering this question.
The marketing manager believes that a $12,000 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?

Question

Data concerning Sotero Corporation's single product appear below:  The company is currently selling 5,000 units per month. Fixed expenses are $319,000 per month. Consider each of the following questions independently.
-This question is to be considered independently of all other questions relating to Sotero Corporation. Refer to the original data when answering this question.
The marketing manager believes that a $12,000 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?

Quizplus · Accepted Answer

First, calculate the contribution margin per unit:
Selling price per unit - Variable expenses per unit
$64 - $42 = $22

Next, calculate the current total contribution margin:
Contribution margin per unit * Number of units sold
$22 * 5,000 = $110,000

Then, calculate the new total contribution margin with the increase in sales:
Contribution margin per unit * (Number of units sold + Increase in units sold)
$22 * (5,000 + 180) = $112,860

Finally, calculate the net operating income under the new scenario:
New total contribution margin - Fixed expenses - Increased advertising budget
$112,860 - $319,000 - $12,000 = -$218,140

Since the net operating income is negative, the company would experience a decrease in net operating income of $3,120 ($218,140 - $215,020) if they were to increase the monthly advertising budget by $12,000, as expected increase in sales will not be enough to cover the increased advertising cost.

Data Concerning Sotero Corporation's Single Product Appear Below: the Company