Question - The unit product costs at a normal level of 5,000 units per month and selling price of $90 are as follows:
Manufacturing costs:
Direct materials $35
Direct labor $12
Variable overhead $8
Fixed overhead (total for year = $300,000) $5
Selling and Admin costs:
Variable $15
Fixed (total for year = $480,000) $8
This product is sold at a rate of 60,000 units per year. It is predicted that a price increase to $98 will decrease volume by 10%. An advertising campaign is proposed to support the price increase.
How much can advertising expense be spent to support the price increase and without having operating income fall below the current levels?