Kuzio Corporation produces and sells a single product. Data concerning that product appear below:Per Unit Percent of SalesSelling price $ 130 100 %Variable expenses 52 40 %Contribution margin $ 78 60 %The company is currently selling 6,500 units per month. Fixed expenses are $209,000 per month. The marketing manager believes that a $7,200 increase in the monthly advertising budget would result in a 120 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?

Income will increase in $2,160

Explanation:

Giving the following information:

The marketing manager believes that a $7,200 increase in the monthly advertising budget would result in a 120 unit increase in monthly sales.

First, we need to determine the actual net operating income:

Sales= 130*6,500= 845,000

Variable cost= 52*6,500= (338,000)

Contribution margin= 507,000

Fixed costs= (209,000)

Net operating income= $298,000

Now, we can calculate the effect on income:

Contribution margin= (6,500 + 120)*78= 516,360

Fixed costs= (209,000 + 7,200)= (216,200)

Net operating income= 300,160

Income will increase in (300,160 - 298,000)= $2,160

$2,160 increase

Explanation:

For 6,500 units:

Contribution margin = (6,500 × 130) - (6,500 × 52) = $507,000

Net operating income = Contribution - Fixed expenses = $507,000 - $209,000 = $298,000

For 6,620 units:

Note that 6,620 units is obtained by adding the 120 unit increase to the current 6,500 units.

Contribution margin = (6,620 × 130) - (6,620 × 52) = $522,600

Net operating income = $522,600 - ($209,000 + $7,200) = $300,160

Change in profit:

Change in profit = $300,160 - $298,000 = $2,160 increase.

Conclusion:

The overall effect on the company's monthly net operating income of this change should be $2,160 increase.

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