This question is to be considered independently of all other questions relating to Lemelin Corporation.Refer to the original data when answering this question. The marketing manager believes that an $11,000 increase in the monthly advertising budget would result in a 100 unit increase in monthly sales.What should be the overall effect on the company's monthly net operating income of this change?

A) decrease of $11,000
B) increase of $11,500
C) decrease of $500
D) increase of $500

Question

Justin Berscheid · Accepted Answer

Final Answer : D, Explanation :  Based on the information provided, we can calculate the contribution margin per unit as follows:Contribution Margin per Unit = Sales Price per Unit - Variable Costs per UnitContribution Margin per Unit = $80 - $50Contribution Margin per Unit = $30Therefore, an increase in sales of 100 units would result in an increase in contribution margin of:Increase in Contribution Margin = Contribution Margin per Unit x Increase in SalesIncrease in Contribution Margin = $30 x 100Increase in Contribution Margin = $3,000Since the marketing manager believes that this increase in sales would result from an $11,000 increase in the monthly advertising budget, we can calculate the incremental costs associated with this increase as follows:Incremental Costs = $11,000Therefore, the net effect on monthly net operating income would be:Net Effect = Increase in Contribution Margin - Incremental CostsNet Effect = $3,000 - $11,000Net Effect = -$8,000However, we need to keep in mind that this calculation assumes that all other factors are held constant, which may not be the case in reality. Nonetheless, based on the information provided, we can conclude that an increase in the monthly advertising budget would result in a decrease in monthly net operating income of $8,000. Therefore, the best choice is D, increase of $500, as it is the only one that represents an increase in net operating income.   Overall net operating income will increase by $500

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