Cobble Corporation produces and sells a single product. Data conceming that prod

Question

Cobble Corporation produces and sells a single product. Data conceming that product appear below Percont of Selling price Variable expenses contribution margin Fer Unit $160 40 112 Sales 1009 309 701 Flxod expenses are $499,000 per month The company is curently selling 5,000 units per month The markoting managor would liko to cut the seling price by $13 and increaso the advertsing budgot by $33,000 per month. The markoting manager predicts that these two changes woukd increase monthly saes by 900 unts. What shoukd be the overal offect on the compeny's monthly net operating income of this change?

Explanation / Answer

Current Operating Income

=Contribution per unit x Number of units – Fixed costs

= $112 x 5,000 - $499,000

= $61,000 per month

New contribution per unit

= Old contribution - $13

= $99 per unit

New units sold

= Old + 900

= 5,000 + 900

= 5,900 units

New Fixed costs

= Old + $33,000

= $499,000 + $33,000

= $532,000

New Operating Income

= $99 x 5,900 - $532,000

= $52,100 per month

So, the change will results in a fall in current Operating Income by

= Old – New

= $61,000 - $52,100

= $8,900

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