Laro Corporation produces and sells a single product with the following characte
ID: 2352206 • Letter: L
Question
Laro Corporation produces and sells a single product with the following characteristics:PER UNIT .....................PERCENT OF SALES
SELLING PRICE.............................$150..............................100%
VARIABLE EXPENSES.................75...................................50%
CONTRIBUTIOM ,ARGIN.........$75..................................50%
The company is currently selling 5,000 units per month. Fixed expenses are $302,000 per month.
The marketing manager would like to cut the selling price by $13 and increase the advertising budget by $17,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 1,200 units. What should be the overall effect on the company's monthly net operating income of this change
Explanation / Answer
Sales : 5000 x 150 $750,000 Variable cost 5000 x 90 $450,000 Contribution $300,000 Less Fixed cost $243,000 Profit 57,000 Additional sales 180 x 150 $ 27,000 less Variable cost 180x90 $ 16,200 ---------------- contribution 10,800 Advertisement 11,000 - 200 As the new proposal is not covering the contribution, it is not advisable to take it. There will be a reduction of $200 in the net profit. 57,000 - 200 =$56,800 per month.
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