The company is currently selling 5,000 units per month. Fixed expenses are $243,000 per month. The marketing manager believes that an $11,000 increase in the monthly advertising budget would result in a 180 unit increase in monthly sales. What should be the overall effect on the company's monthly net operating income of this change?

If the company decides to increase its advertising budget, its net profits will decrease by $200 ( = $56,800 - $57,000).

Explanation:

The company is currently selling 5,000 units per month at $150 per unit, and its total variable costs are $90 per unit.

Fixed expenses are $243,000 per month.

Current income statement:

sales revenue = $750,000

minus variable costs = ($450,000)

minus fixed costs = ($243,000)

net income = $57,000

If the company increases its advertising budget be $11,000 it should sell 180 more units per month, the new income statement would be:

sales revenue = $777,000

minus variable costs = ($466,200)

minus fixed costs = ($254,000)

net income = $56,800

If the company decides to increase its advertising budget, its net profits will decrease by $200 ( = $56,800 - $57,000).