Net Operating Income Managerial Accounting Question Need Help

Question

Mehmet Company sold 60,000 units and earned $40,000 of operating income in the current month. Margin of safety in the current month was 20,000 units. The firm's marketing manager suggest that, if the company runs TV commercials at a cost of $10,000 per month, the sales volume could reach 70,000 units next month without need to lower the sales price. If the marketing manager's suggestion is taken, what will be the net operating income for next month?

 

A) 50,000 B) 60,000 C) 70,000 D) 40,000 E) cannot be determined

 

Answer was D) but I need help with steps as to how.

Thanks.

Answer 1

STEP 1 - Find OpI_60k per unit

1.  SUBTRACT Margin of Safety from Total Units Sold (because OpI was derived from sales beyond the MoS). 

          60k units - 20k units = 40k units

2.  DIVIDE OpI by the non-MoS units

          $40k/40k units = $1/1 unit

 

STEP 2 - Find OpI_70K w/o additional cost

70k - 20k (MoS) = 50k units

          $1*50k= $50k

 

STEP 3 - Find difference between OpI_60k and OpI_70k 

          $50K - $40K = $10k 

 

STEP 4 - Find difference between result from STEP 3 and additional cost

          OpI_70k of $10k - commercial cost of $10K = $0 

 

STEP 5 - ADD additional OpI to original OpI

          $40k + $0 = $40K