Questions: Fixed expenses are 30,000 per month and the company is selling 2,000 units per month. Required: 1-a. How much will net operating income increase (decrease) per month if the monthly advertising budget increases by 5,000, the monthly sales volume increases by 100 units, and the total monthly sales increase by 9,000? 1-b. Should the advertising budget be increased?

Solution Steps

To solve this problem, we need to calculate the change in net operating income given the changes in advertising budget, sales volume, and total sales. We will then determine if the advertising budget should be increased based on the net operating income change.

1-a. Calculate the increase in net operating income:

• Increase in advertising budget: $5,000
• Increase in sales volume: 100 units
• Increase in total sales: $9,000

1-b. Determine if the advertising budget should be increased based on the net operating income change.

1-a.

1. Calculate the additional revenue from the increase in sales volume.
2. Calculate the new total revenue.
3. Subtract the increased advertising budget from the additional revenue to find the change in net operating income.

1-b.

1. If the net operating income increases, the advertising budget should be increased. Otherwise, it should not.

The additional revenue from the increase in sales volume is given as $9,000.

The change in net operating income is calculated by subtracting the increase in the advertising budget from the additional revenue: \[ \text{Change in Net Operating Income} = \text{Additional Revenue} - \text{Increase in Advertising Budget} \] \[ \text{Change in Net Operating Income} = 9000 - 5000 = 4000 \]

If the change in net operating income is positive, the advertising budget should be increased. In this case, the change in net operating income is $4,000, which is positive.

Final Answer