Data concerning Lemelin Corporation's single product appear below:

Data concerning Lemelin Corporation's single product appear below:

	Per Unit			Percent of Sales
Selling price	$	230			100	%
Variable expenses		115			50	%
Contribution margin	$	115			50	%

The company is currently selling 7,000 units per month. Fixed expenses are $581,000 per month.

 

The marketing manager would like to cut the selling price by $18 and increase the advertising budget by $37,000 per month. The marketing manager predicts that these two changes would increase monthly sales by 1,600 units. What should be the overall effect on the company's monthly net operating income of this change?

Multiple Choice

• increase of $302,200
• decrease of $118,200
• decrease of $7,800

  Correct
• increase of $118,200

  Incorrect

Explanation

Unit sales (increase by 1,600 units)	7,000 units			8,600 units
Sales (at $230 per unit and $212 per unit)	$	1,610,000		$	1,823,200
Variable expenses (at $115 per unit)		805,000			989,000
Contribution margin		805,000			834,200
Fixed expenses (increase by $37,000)		581,000			618,000
Net operating income	$	224,000		$	216,200

Overall net operating income will decrease by $7,800