Bethard Corporation produces and sells a single product. Data concerning that product appear below: Per UnitPercent of SalesSelling price$120 100%Variable expenses 24 20%Contribution margin$96 80%Fixed expenses are $354,000 per month. The company is currently selling 5,000 units per month.Required:The marketing manager would like to cut the selling price by $8 and increase the advertising budget by $23,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 600 units. What should be the overall effect on the company's monthly net operating income of this change?
What will be an ideal response?
| New selling price ($120 per unit - $8 per unit) | $ | 112 | |
| New contribution margin ($112 per unit - $24 per unit) | $ | 88 | |
| New unit monthly sales (5,000 units + 600 units) | 5,600 | ||
| New total contribution margin: 5,600 units × $88 per unit | $ | 492,800 | |
| Present total contribution margin: 5,000 units × $96 per unit | 480,000 | ||
| Change in total contribution margin | 12,800 | ||
| Less increase in advertising budget | 23,000 | ||
| Change in net operating income | $ | (10,200 | ) |
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