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29 August, 08:58

Thornbrough Corporation produces and sells a single product with the following characteristics: Per Unit Percent of Sales Selling price $ 220 100 % Variable expenses 44 20 % Contribution margin $ 176 80 % The company is currently selling 7,000 units per month. Fixed expenses are $901,000 per month. The marketing manager would like to cut the selling price by $18 and increase the advertising budget by $53,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 1,000 units. What should be the overall effect on the company's monthly net operating income of this change

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  1. 29 August, 09:03
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    The income will decrease by $21,000

    Explanation:

    Giving the following information:

    Selling price $ 220

    Variable expenses 44

    Contribution margin $ 176

    Sales in units = 7,000

    Total contribution margin = 7,000*176 = $1,232,000

    Fixed expenses = ($901,000)

    Net operating income = 331,000

    Now, with the changes we calculate the new net operating income:

    New sales price = $202

    New fixed cost = (53,000 + 901,000) = 954,000

    New unit sales = 8,000

    Net operating income = 8,000 * (202 - 44) - 954,000 = $310,000

    The income will decrease by $21,000
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