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 would like to cut the selling price by $7 and increase the advertising budget by $20,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 500 units. 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 would like to cut the selling price by $7 and increase the advertising budget by $20,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 500 units. What should be the overall effect on the company's monthly net operating income of this change?

Quizplus · Accepted Answer

Selling price cut by $7 would decrease the contribution margin per unit by $7. However, the increase in sales volume by 500 units would result in an increase in the total contribution margin of $41,500 (500 units x $83 contribution margin per unit).
On the other hand, the increase in advertising budget by $20,000 would increase fixed expenses by $20,000.
Therefore, the overall effect on the company's monthly net operating income would be a decrease of $16,500 ($41,500 - $20,000 - $7,000).

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