Assume the company is considering a reduction in the selling price by $10 per unit and an increase in advertising budget by $5,000. This will increase sales volume by 50%. What is the net operating income after the changes?a. $5,000
b. $60,000
c. $25,000
d. $35,000

C) $25,000

Explanation:

new selling price = $110 - $10 = $100

new sales level = 1,000 units + 50% = 1,500 units

variable expenses = $90 per unit remain the same

new fixed expenses including advertising = $30,000 + $5,000 = $35,000

operating income before changes:

total revenue = $110 x 1,000 units = $110,000

variable costs = $60 x 1,000 units = ($60,000)

fixed costs = ($30,000)

operating income = $20,000

new operating income:

total revenue = $100 x 1,500 units = $150,000

variable costs = $60 x 1,500 units = ($90,000)

fixed costs = ($35,000)

operating income = $25,000

operating income will increase by $5,000 or 25% from $20,000 to $25,000

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