Question

5. Wilson Company prepared the following preliminary budget assuming no advertising expenditures: Sales 1265,000 Selling price $10 per unit * 151. 11.5 ve -> Cocó,000 Unit sales ........................ 100.000 107 0 00 cm SOLD Variable expenses............ $600.000 fe . 400,000 Fixed expenses.. $300,000 -100,000 - 400.000 2.605,000 Based on a market study, the company estimated that it could increase the unit selling price by 15% and increase the unit sales volume by 10% if $100,000 were spent on advertising. Assuming that these changes are incorporated in its budget, what should be the budgeted net operating income? A) $175,000 B) $365,000 C) $205,000 D) $190,000

Answer 1

Answer is $205,000

Selling Price per unit = $10 + 15% * $10
Selling Price per unit = $11.50

Unit Sales = 100,000 + 10% * 100,000
Unit Sales = 110,000

Variable Cost per unit = Variable Expenses / Unit Sales
Variable Cost per unit = $600,000 / 100,000
Variable Cost per unit = $6.00

Fixed Expenses = $300,000 + $100,000
Fixed Expenses = $400,000

Net Operating Income = Unit Sales * (Selling Price per unit - Variable Cost per unit ) - Fixed Expenses
Net Operating Income = 110,000 * ($11.50 - $6.00) - $400,000
Net Operating Income = 110,000 * $5.50 - $400,000
Net Operating Income = $605,000 - $400,000
Net Operating Income = $205,000