Question

Required information Exercise 5-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume (LO5-4] [The following information applies to the questions displayed below.) Data for Hermann Corporation are shown below: Selling price Variable expenses Contribution margin Per Unit $ 80 52 $ 28 Percent of Sales 100% 65 35% Fixed expenses are $76,000 per month and the company is selling 4,600 units per month. Exercise 5-5 Part 1 Required: 1-a. How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $10,000 and monthly sales increase by $25,000? 1-b. Should the advertising budget be increased? Complete this question by entering your answers in the tabs below. Req 1A Reg 1B How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $10,000 and monthly sales increase by $25,000? (Do not round intermediate calculations.) Net operating income decreases by $ 8,750 < Req1A Req 1B >

Answer 1

Requirement 1

Net operating income Decrease by $1,250

Requirement 2

No the advertising budget should not be changed.

Working

Income earned before accepting advertising budget
	Per Unit	Total	% of sales
Sales revenue	$          80.00	$    368,000.00	100%
Variable cost	$          52.00	$    239,200.00	65%
Contribution margin	$          28.00	$    128,800.00	35%
Fixed cost		$      76,000.00
Net income		$      52,800.00

.

Income earned after accepting advertising budget
	Per Unit	Total	% of sales
Sales revenue	$          75.00	$    393,000.00	100%
Variable cost	$          55.00	$    255,450.00	65%
Contribution margin	$          20.00	$    137,550.00	35%
Fixed cost		$      86,000.00
Net income		$      51,550.00

.

Income earned before accepting advertising budget	$ 52,800.00
Income earned after accepting advertising budget	$ 51,550.00
Net Decrease in income	$ (1,250.00)