Calculate the increase or decrease in net operating income if a $5,000 increase in the monthly advertising budget would increase monthly sales by $9,000.
Per unit Percent of Sales
Selling price
$90 100%
Variable expenses
$63 70%
Contribution margin
$27 30%


Fixed expenses are $30,000 per month and the company is selling 2,000 units per month.

I am confused about what this question is asking me to do and following the multiple steps to find the answer. Thanks for the help!

I'm not sure if you understood the answer to your other question. It helps if you can let us know so we know if you are following. I'm going to assume you did and go from there, but please let me know if you didn't.

In this problem, you are given the info to compute the net income under current conditions and then asked to compute it if more money is put into advertising. I'll show you the current and get you started on the possible change.

Sales = 2000 units at $90 each ..................180,000
Var costs = 2000 units at $63 each ............126,000
cont margin = 2000 units at $27 each ...........54,000
Fixed costs............................................. ..30,000
Net Income............................................ ...24,000

The problem states that an increase in advertising of $5,000 will bring in $9,000 in sales. Do what I did above to show these changes. If you understood the last question, you will know how to do this. You know sales increased by $9,000. What do variable costs increase by? In this case fixed costs increase because advertising is a fixed cost.

Sales= 189000
Variable Costs= 126000? I am still confused here!
Fixed Costs= 35,000

Variable costs are costs that increase in the same proportion as units sold. You can do this as a % or as in number of units. Let's walk through it. How many additional units are sold to increase sales by $9,000?

126000/90 = 1400
Variable costs 1400+126000=127,400

No. Try it this way. You know the sales price is $90 a unit. At 2000 units, you sold $180,000 (2,000 * $90). How many units would you have to sell to reach $189,000?

2100 units

Quote:

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Originally Posted by mlauni

2100 units

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Right. What is the variable cost per unit? It's in the original question and my post above.

$63
63x2100=132300

That's right. So using that number, can you compute the monthly income if they spent the $5000 on advertising. I think you have it, but let's just make sure. :)

Sales 189000
VC 132300
FC 35000

CM 56700
NOI 21700

?

$21,700 is correct. Now the question asks what is the increase or decrease in net income if the advertising money is spent. That's the final number you need. What is it, and be sure to say whether it's an increase or decrease?

-2300 decrease. Thank you sooo much!

You're welcome. :)