Ringstaff Corporation produces and sells a single product. Data concerning that

Question

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

Per Unit Percent of Sales
Selling price : $158 100%
Variable expenses : 39.5 25%
Contribution margin : $118.5 75%

The company is currently selling 6,200 units per month. Fixed expenses are $603,000 per month. The marketing manager believes that a $31,980 increase in the monthly advertising budget would result in a 280 unit increase in monthly sales. What should be the overall effect on the company monthly net operating income of this change ?
a) Decrease of $31,980
b) Decrease of $1,200
c) Increase of $33,180
d) Increase of $1,200

Explanation / Answer

Sales toady = 979,600 Variable expense today (with sales of 6200 units) = 39.5 * 6200 = 244,900 Fixed expense today = 603,000 Total expense today = 603,000 + 244,900 = 847,000 Profit today = 979,600 - 847,000 = 131,700 Variable expense after advertising (with sales of 6480) = 255,960 Fixed + advertising expense for 6480 units = 603,000 + 31,980 = 634,980 Fixed + advertising expense + variable expense = 890,940 Sales revenue = 158 * 6480 = 1,023,840 Profit after advertising = 132,900 Change in income = 132,900 - 131,700 = 1,200 (increase) Hence answer is (d)

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