This question is to be considered independently of all other questions relating to Houpe Corporation.Refer to the original data when answering this question. The marketing manager would like to cut the selling price by $7 and increase the advertising budget by $28,000 per month.The marketing manager predicts that these two changes would increase monthly sales by 500 units.What should be the overall effect on the company's monthly net operating income of this change?

A) decrease of $17,500
B) increase of $17,500
C) decrease of $24,500
D) increase of $38,500

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Marissa Moreno · Accepted Answer

Final Answer : C, Explanation :  Cutting the selling price by $7 will decrease the contribution margin by $7 per unit. Increasing the advertising budget by $28,000 will increase the fixed costs by $28,000. The increase in monthly sales by 500 units will result in an increase in revenue of $75,000 ($150 x 500 units). Therefore, the total net effect on the monthly net operating income can be calculated as follows:Net effect = (increase in revenue) - (increase in variable costs) - (increase in fixed costs)Net effect = ($75,000) - ($7 x 500 units) - ($28,000)Net effect = $24,500 decrease in monthly net operating income.   Overall net operating income will decrease by $24,500

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