Question

Dybala Corporation produces and sells a single product. Data concerning that product appear below:

	Per Unit				Percent of Sales
Selling price	$	125				100	%
Variable expenses		75				60	%
Contribution margin		50				40	%

The company is currently selling 5,320 units per month. Fixed expenses are $240,000 per month. The marketing manager believes that a $7,600 increase in the monthly advertising budget would result in a 330 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?

a) increase of $8,9000

b) decrease of $7,600

c) increase of $16.500

d) decrease of $8,900

Answer 1

Solution:

Particulars	Current Situation	Proposed Situation
Units Sales (5320+330)	$5,320	$5,650
Sales	$665,000	$706,250
Variables Expenses	$399,000	$423,750
Contribution Margin	$266,000	$282,500
Fixed Expenses	$240,000	$247,600
Net Operating Income	$26,000	$34,900

Net Operating Income will be Increase by ( $34,900 - $26,000 ) = $8,900