ann Corporation are shown below Selling price Variable expenses Per Unit $ 125 8

Question

ann Corporation are shown below Selling price Variable expenses Per Unit $ 125 80 of Sales 100% 64% Contribution margin $ 45 36% Fixed expenses are $85,000 per month and the company is selling 2.700 units per month. 2 value 10.00 points Required: 1-a. The marketing manager argues that a s9,000 increase in the monthly advertising budget would increase monthly sales by $20,000. Calculate the increase or decrease in net operating income. ecreases $ 1,800 1-b. Should the advertising budget be increased? Yes No Type here to search

Explanation / Answer

a.)

The Contribution is 36% of Sales,

So, if there is a increase of $20,000 in sales, it means increase of $7,200 in contribution.(20000*36%)

Which is not covering the cost being incurred for such additional sales i.e $9,000

Yes, the net operating income would decrease by $1,800 (9000-7200)

The total contribution. As the sales are increasing by $20,000 that means the units sold increase by 160 (20000/125)

So, Advertising Budget should NOT be increased.

b.)

It improves the existing income by $8,100 per month.

So, Higher Quality Components should be used.

Good luck

Particulars Current New Contribution per Unit 45 45 Units Sold 2,700 2,860 Total Contribution 121,500 128,700 Fixed Expenses 85,000 85,000 Advertising Expense (New) - 9,000 Net Operating Income 36,500 34,700

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