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14 November, 09:57

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?

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  1. 14 November, 10:15
    0
    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
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