Kuzio Corporation produces and sells a single product. Data concerning that prod
ID: 2334821 • Letter: K
Question
Kuzio Corporation produces and sells a single product. Data concerning that product appear below:
The company is currently selling 7,100 units per month. Fixed expenses are $199,000 per month. The marketing manager believes that a $6,700 increase in the monthly advertising budget would result in a 110 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?
Per Unit Percent of Sales Selling price $ 150 100 % Variable expenses 90 60 % Contribution margin $ 60 40 %Explanation / Answer
Net operating income = Sales - Variable costs - Fixed costs
Current net operating income = (7,100 units * 150 per unit) - (7,100 units * 90 per unit) - 199,000
= 1,065,000 - 639,000 - 199,000
= 227,000
Proposed net operating income = (7,210 units * 150 per unit) - (7,210 units * 90 per unit) - 205,700
= 1,081,500 - 648,900 - 205,700
= 226,900
Decrease in net operating income = 227,000 - 226,900 = 100
Overall effect on the company's monthly net operating income = Net operating income decreases by 100
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