Question

The company recorded $5,000 sales with 60% contribution margin ratio in 2019. According to the sales manager, the company can increase the sales volume by 30% this year if the company spends $400 as advertisement expense and decreases the selling price by 10%, while unit variable cost remains the same. If CEO approves the plan, how does it affect the net operating income in 2020

Answer 1

Answer:

$150 Decrease

Explanation:

                  Income Statement

                                      Present    Proposed

Sales                              $5,000    $5,350 [(5000+30%)-10%]

Variable 10%                  $2,000    $2,000 (2000*130%)

Contribution Margin      $3,000    $3,250

Fixed cost                           -          $400  

Net Operating Income $3,000    $2,850

Effect on Net Operating Income = $2,850 - $3,000 = -$150