Thornbrough Corporation produces and sells a single product with the following c

Question

Thornbrough Corporation produces and sells a single product with the following characteristics:

The company is currently selling 7,000 units per month. Fixed expenses are $901,000 per month.

The marketing manager believes that a $28,000 increase in the monthly advertising budget would result in a 190 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?

Multiple Choice

decrease of $28,000

increase of $33,440

increase of $5,440

decrease of $5,440

Per Unit Percent of Sales Selling price $ 220 100 % Variable expenses 44 20 % Contribution margin $ 176 80 %

Explanation / Answer

Net operating income will increase by $5,440.

Sales (190 x $220) $41,800 Less: Variable expenses (190 x $44) 8,360 Contribution margin $33,440 Less: Advertising expenses $28,000 Net operating income $5,440

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