Question

Data concerning Homme Corporation's single product appear below: Selling price. .............. Variable expenses......... Contribution margin ..... Per Unit $190 114 $ 76 Percent of Sales 100% 60% 40% The company is currently selling 2,000 units per month. Fixed expenses are $130,000 per month. Consider each of the following questions independently. This question is to be considered independently of all other questions relating to Homme Corporation. Refer to the original data when answering this question. The marketing manager believes that a $12,000 increase in the monthly advertising budget would result in a 190 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change? o increase of $2,440 decrease of $12,000 increase of $14,440 decrease of $2,440

Answer 1

• current operating income p.m= (2000units *190)-(2000units *114)- $130000

= 3,80,000-2,28,000-1,30,000

=$22,000

• If sales increase by 190 units p.m then operating profit= (2190units*190)-(2190*114)-1,30,000-12,000

= 4,16,100-2,49,660-1,30,000-12,000

=$24,440

• by comparing the 2cases after incurring additional expenses of $12,000 the company is earning additional income of $2,440($24,440-$22,000).

So, answer is a- increase of $2,440/-