Kuzio Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $ 150 100 % Variable expenses 90 60 % Contribution margin $ 60 40 % The company is currently selling 6,500 units per month. Fixed expenses are $193,000 per month. The marketing manager believes that a $5,400 increase in the monthly advertising budget would result in a 120 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?

Overall effect of the change is an increase in net operating income of $1800

Explanation:

The net operating income with additional advertising spend is shown below:

Sales (6620*$150) $993,000

Variable expenses (60%*993000) ($595,800)

contribution margin $397,200.

Fixed expenses ($193000+$5400) ($198,400)

Net operating income $198,800

The net operating income without additional advertising spend is shown below:

Sales (6500*$150) $975,000

Variable expenses (60%*975,000) ($585,000)

contribution margin $390,000

Fixed expenses ($193,000)

Net operating income $197,000

The overall effect of the change is an increase in net operating income of $1800 ($198800-$197000)