Question

Data for Hermann Corporation are shown below:Per unit Percent of SalesSelling price $90 100%Variable expenses 63 70%Contribution margin $27 30%Fixed expenses are $30,000 per month and the company is selling 2,000 units per month.Requirement 1:(a) Calculate the increase or decrease in net operating income if a $5,000 increase in the monthly advertising budget would increase monthly sales by $9,000.(b) Should the advertising budget be increased as suggested in requirement 1(a) above?Requirement 2:Refer to the original data. Management is considering using higher-quality components that would increase the variable cost by $2 per unit. The marketing manager believes the higher-quality product would increase sales by 10% per month. Should the higher-quality components be used?

Answer 1

Answers are given below.

Step-by-step explanation:

1-a : current net operating income: = (Sales x cm) - Fixed Expenses

= (2000 x 27 )-30000 =24000

New Sales:

(90x 2000)+ 9000=189000

Contribution Margin: =18700

189000 * 30% = 56700

New net operating income: 56700-(30000+5000)

= 21700

Decrease in net operating income= 2300

1-b = No.