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8 October, 14:25

The sales manager is convinced that a 11% reduction in the selling price, combined with a $70,000 increase in advertising, would increase this year's unit sales by 25%. If the sales manager is right, what would be this year's net operating income if his ideas are implemented?

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  1. 8 October, 14:41
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    Incomplete question.

    Here's the completed part:

    Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses are $40.00 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows: Sales $ 2,080,000 Variable expenses 1,040,000 Contribution margin 1,040,000 Fixed expenses 180,000 Net operating income $ 860,000

    Required: Answer each question independently based on the original dа ta:

    The sales manager is convinced that a 15% reduction in the selling price, combined with a $77,000 increase in advertising, would increase this year's unit sales by 25%.

    If the sales manager is right, what would be this year's net operating income if his ideas are implemented?

    Answer:

    $1,303,000

    Explanation:

    Note that advertising cost is a variable expense. Increase in unit sales by 25% implies;

    New Sales: $2,080,000 + 25% of 2080000 = 2080000+520,000 = $2,600,000.

    Also remember that variable cost increase by $77,000 as a result of advertising expense, implies

    Variable expenses: 1,040,000 + 77,000 = $1, 117,000.

    New Contribution margin = $2,600,000 - $1,117000 = $1,483,000.

    New Net operating income = New Contribution Margin - Fixed expenses = $1,483,000 - $180,000 = $1,303,000.
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