Question

Fixed expenses are $625,000 per month. The company is currently selling 9,000 units per month. The marketing manager would like to cut the selling price by $6 and increase the advertising budget by $46,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 800 units. What should be the overall effect on the company's monthly net operating income of this change?

Answer 1

Decrease of $40,800 after introducing new marketing policy

Step-by-step explanation:

As per the data given in the question,

Profit = Sales - Total cost

= 9,000 × $100 - ( 9,000 × $20 + $625,000)

= $95,000

To calculate new profit:

New unit = 9,000 + 800 = 9,800 units

Selling price = $100 - $6 = $94 per unit

Fixed cost = $625,000 + $46,000

= $671,000

Now Profit = $94 × 9,800 - ($20 × 9,800 + $671,000)

= $54,200

Since, introducing the new marketing policy profit will be decreased = $95,000 - $54,200

= $40,800

Hence, There will be decrease of $40,800