Assume the company is considering a reduction in the selling price by $10 per unit and an increase in advertising budget by $5,000. This will increase sales volume by 50%. What is the net operating income after the changes? a) $5,000b) $60,000c) $25,000d) $35,000

Question

Howard Costa

Business

19 January, 02:44

Assume the company is considering a reduction in the selling price by $10 per unit and an increase in advertising budget by $5,000. This will increase sales volume by 50%. What is the net operating income after the changes? a) $5,000b) $60,000c) $25,000d) $35,000

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Answers (1)

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Yang · Answer 1

Intructions are below.

Explanation:

Giving the following information:

Reduction on selling price = $10 per unit

increase in the advertising budget = $5,000.

This will increase sales volume by 50%

We don't have the information need to solve the requirement (selling price, unitary variable cost, sales in units). But, I can provide with the formula and a small example to guide and answer.

The reduction of the price without reducing the unitary variable cost will harm the contribution margin per unit. The increase in fixed costs will low the income. Never the less, if the contribution margin remains positive, the 50% increase in sales will have a positive effect on income.

Effect on income = Increase in sales*unitary contribution margin - increase in fixed costs

Suppose that the sales increase in 5,000 units, the new contribution margin (selling price - unitary variable cost) is $20.

Effect on income = 5,000*20 - 5,000 = $95,000 increase