Net Operating Income Question Accounting Need Help

Question

Mehmet Company sold 60,000 units and earned $40,000 operating income in the current month. Margin of safety in the current month was 20,000 units. The firm's marketing manager suggests that, if the company runs TV commercial at a cost of $10,000 per month, the sales volume could reach 75,000 units next month without the need to lower the sales price. If 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 1

The correct answer is D) 40,000.

 

We know that 60,000 units sold and they generated $40,000 in operating income. This means for each additional $1.00 of operating income I need to sell 1.5 additional units. The TV commercial ad will cost $10,000 but it will generate 15,000 in additional unit sales(75,000-60,000). To convert these additional units to operating income divide 15,000 by 1.5= 10,000 additional operating income. Therefore the new operating income after the TV commercial is also 40,000 which is the net of 40,000 Op Income +10,000 additional Op income-10,000 TV commercial cost.