Thomason Corporation has provided the following contribution format income statement.

Sales (1,000 units)

$

40,000

Variable expenses

30,000

Contribution margin

10,000

Fixed expenses

7,000

Net operating income

$

3,000

If the variable cost per unit increases by $1, spending on advertising increases by $2,000, and unit sales increase by 50 units, the net operating income would be closest to:

Question

Thomason Corporation has provided the following contribution format income statement.

Sales (1,000 units)

$

40,000

Variable expenses

30,000

Contribution margin

10,000

Fixed expenses

7,000

Net operating income

$

3,000

If the variable cost per unit increases by $1, spending on advertising increases by $2,000, and unit sales increase by 50 units, the net operating income would be closest to:

BlackTom AI · Accepted Answer

We start by restating the scenario and the choices to ensure clarity.
Question setup: Thomason Corporation’s original data shows 1,000 units sold withSales 40,000; Variable expenses 30,000; Contribution margin 10,000; Fixed expenses 7,000; Net operating income (NOI) 3,000.
New scenario changes:
- Variable cost per unit increases by 1 dollar.
- Advertising spending increases by 2,000 (affecting fixed costs).
- Unit sales increase by 50 units (so total units = 1,050).
- We assume the selling price per unit remains the same (implied by original data). 
Now, evaluate each option step by step:
Option A: $2,150
- Compute the new sales: 1,050 units × $40 per unit = $42,000.
- Compute the new variable cost per unit: original variable cost per unit = 30,000 / 1,000 = $30; increase by $1 → $31 per unit.
- New total variable expenses: 1,050 × $31 = $32,550.
- New contribution margin (CM): $42,000 − $32,550 = $9,450.
- New fixed expenses: original 7,000 + advertising increase 2,000 = $9,000.
- NOI: CM − Fixed = $9,450 − $9,000 = $450, not $2,150. Thus this option is incorrect.
Option B: $9,450
- This would imply NOI equals the new CM, meaning fixed expenses are zero, which contradicts the stated fixed costs (even before considering the advertising increase). Since NOI = CM − Fixed, with CM = $9,450 and Fixed = $9,000, NOI is $450, not $9,450. Therefore, this option is incorrect.
Option C: $450
- From the calculations above: CM = $9,450 and Fixed = $9,000, so NOI = $9,450 − $9,000 = $450. This matches the scenario's math exactly.
Option D: $1,000
- For NOI to be $1,000, either CM would need to be higher or fixed costs lower than in the scenario. Given the computed CM of $9,450 and fixed costs of $9,000, NOI cannot be $1,000 under these changes. Hence this option is incorrect.
Summary of reasoning:
- The key changes are a $1 per unit rise in variable cost, a $2,000 rise in fixed costs due to advertising, and a 50-unit increase in volume, leading to 1,050 units sold at $40 each and variable cost per unit of $31.
- These yield CM = 42,000 − 32,550 = 9,450 and Fixed = 7,000 + 2,000 = 9,000, hence NOI = 9,450 − 9,000 = 450.
- The other options do not align with these calculated figures, either because they misstate the fixed costs, miscalculate CM, or disregard the impact of the higher volume and higher variable cost per unit.

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