Question

Data for Hermann Corporation are shown below: Percent of Sales 1005 Selling price Variable expenses Contribution margin Per Unit $110 77 $ 33 301 Fixed expenses are $82,000 per month and the company is selling 3,500 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 $8,700 and monthly sales increase by $18.500? -b. Should the advertising budget be increased? Complete this question by entering your answers in the tabs below. Reg 1A Reg 1B How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $8,700 and monthly sales increase by $18,500? (Do not round intermediate calculations.) Net operating income by

Answer 1

Current net operating income = (Contribution margin X Units sold) - Fixed cost

= ($33 X 3,500) - $82,000

= $33,500

New net operating income = ($33 X 3,500) + ($18,500 X 30%) - $82,000 - $8,700

= $30,350

Decrease in net operating income = $33,500 - $30,350 = $3,150

1-a. Net operating income Decrease by $3,150

1-b. No, the advertising budget should not be increased.