Kuzio Corporation produces and sells a single product. Data concerning that product appear below:
Per Unit Percent of Sales
Selling price $ 150 100 %
Variable expenses 60 40 %
Contribution margin $ 90 60 %
The company is currently selling 5,200 units per month. Fixed expenses are $208,000 per month. The marketing manager believes that a $6,600 increase in the monthly advertising budget would result in a 150 unit increase in monthly sales.
Required:
a. What should be the overall effect on the company's monthly net operating income of this change?

The overall effect on the company's monthly net operating income of this change is $ 6,900, increase

Explanation:

Company's monthly net operating income before the change:

Sales  (5,500× $ 150)                                              825,000

Less Variable Costs(  5,500 × $ 60)                     (330,000)

Contribution                                                            495,000

Fixed Expenses (208,000)                                    (208,000)

Net Operating Income                                            287,000

Company's monthly net operating income after the change:

Sales  ((5,500+150)× $ 150)                                    847,500

Less Variable Costs ((5,500+150) × $ 60)            (339,000)

Contribution                                                            508,500

Fixed Expenses (208,000+6,600)                       (214,600)

Net Operating Income                                            293,900

Effect on the company's monthly net operating income:

Net Operating Income - After Change                                          293,900

Net Operating Income - Before Change                                       287,000

Change in Net Operating Income                                                      6,900

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