Problem:

Topeka Company's income statement for the current month shows that the company sold 400,000 units of its product and earned a net operating income of $600,000. Management is very pleased with the result and believes the company's financial position is strong because sales have to go down by 50% from the current level before losses can occur. Management further believes that if the company runs a new TV commercial at a cost of $80,000 per month, sales volume next month could grow by 25% from the current sales level without the need to lower the sales price.

Required:

Question: If this action is taken, what will be the increase or decrease in the next month's net operating income from the current month?

• Increase by 800,000
• Increase by 220,000
• Increase by 300,000
• Decrease by 80,000
• None of the above

Note: Please show the work not just the answer.