Shelhorse Corporation produces and sells a single product. Data concerning that product appear below:

Per Unit Percent of Sales

Selling price $260 100%

Variable expenses 91 35%

Contribution margin $169 65%

Fixed expenses are $366,000 per month. The company is currently selling 6,100 units per month.

The marketing manager believes that a $23,000 increase in the monthly advertising budget would result in a 150 unit increase in monthly sales.

What should be the overall effect on the company's monthly net operating income of this change?

See explanation section.

Explanation:

Requirement 1

At first we have to find the original net income.

Shelhorse Corporation

Contribution format income statement

For the year ended, December 31, 20YY

Sales Revenue (6,100 * $260) = $1,586,000

Less: Variable expense (6,100 * $91) = $555,100

Contribution Margin = $1,030,900

Less: Fixed Expense $366,000

Net Operating Income = $664,900

Requirement 2

As the marketing manager believes that a $23,000 increase in the monthly advertising budget would result in a 150 unit increase in monthly sales, the new sales volume = 6,100 + 150 = 6,250 and new fixed expense = $366,000 + $23,000 = $389,000

Shelhorse Corporation

Contribution format income statement

For the year ended, December 31, 20YY

Sales Revenue (6,250 * $260) = $1,625,000

Less: Variable expense (6,250 * $91) = $568,750

Contribution Margin = $1,056,250

Less: Fixed Expense = $389,000

Net Operating Income = $667,250

The effect on the company's monthly net operating income of this change = $667,250 - $664,900 = $2,350