Kuzio Corporation produces and sells a single product. Data concerning that product appear below:

Per Unit Percent of Sales

Selling price $220 100%

Variable expenses 88 40%

Contribution margin $132 60%

The company is currently selling 6,500 units per month. Fixed expenses are $183,000 per month. The marketing manager believes that an $6,400 increase in the monthly advertising budget would result in a 140 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?

company's monthly net operating income will increase by $ 18480

Explanation:

Given:

case (1)

Number of units sold = 6500

Contribution margin per unit = $ 132

thus, total contribution = 6500 * $ 132 = $ 858000

Fixed expenses per month = $183,000

therefore,

Net profit = total contribution - Fixed expenses per month

or

Net profit = $ 858000 - $183,000 = $ 675000

now, for the case (2)

Number of units sold = 6500 + 140 = 6640

Contribution margin per unit = $ 132

thus, total contribution = 6640 * $ 132 = $ 876480

Fixed expenses per month = $183,000

therefore,

Net profit = total contribution - Fixed expenses per month

or

Net profit = $ 876480 - $183,000 = $ 693480

Increase in the net profit = $ 693480 - $ 675000 = $ 18480

hence,

the company's monthly net operating income will increase by $ 18480