The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1.50 per unit. He thinks that this move, combined with some increase in advertising, would increase this year's sales by 25%. How much could the president increase this year's advertising expense and still earn the same $340,000 net operating income as last year?

Feather Friends, Inc, distributes a high quality wooden birdhouse that sells for $40 per unit. Variable expenses are $20.00 per unit, and fixed expenses total $180,000 per year. It's operating results for last year were as follows:

Sales $ 1, 040, 000

Variable expenses 520,000

Contribution margin 520,000

Fixed expenses 180,000

Net operating income 340,000

1. The sales manager is convinced that a 12% reduction in the selling price, combined with a $77,000 increase in advertising, would increase this year's unit sales by 25%.

a. If the sales manager is right, what would be this year's net operating income if his ideas are implemented?

b. Do you recommend implementing the sales manager's suggestions?

2. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1.50 per unit. He thinks that this move, combined with some increase in advertising, would increase this year's sales by 25%. How much could the president increase this year's advertising expense and still earn the same $340,000 net operating income as last year?

Explanation:

The solution is shown in the attached file