Question

Required information Exercise 2-5 (Algo) Changes in Variable Costs, Fixed Costs, Selling Price, and Volume (LO2-4] [The following information applies to the questions displayed below.] Data for Hermann Corporation are shown below: Percent of Sales 100% 70 Per Unit $ 70 49 $ 21 Selling price Variable expenses Contribution margin 30% Fixed expenses are $74,000 per month and the company is selling 4,400 units per month. Exercise 2-5 (Algo) Part 1 Required: 1-a. How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $9,800 and monthly sales increase by $24,000? 1-b. Should the advertising budget be increased?

Answer 1

Particulars Current Sales Sales with advertising Expenses Differences Sales $ 3,08,000 $ 3,32,000 $ 24,000 4400*70 70*4400+24000 Less: Variable expenses $ 2,15,600 $ 2,32,400 $ 16,800 149*4400 (332000/70) *49 Contribution margin $ 92,400 $ 99,600 $ 7,200 Fixed Expenses $ 74,000 $ 83,800 $ 9,800 74000+9800 Net Income $ 18,400 $ 15,800 $ -2,600 b. No, advertising budget should be increased, because it leads in reduction of net income (-2300)