Question

Data for Hermann Corporation are shown below: Percent of Sales 100% 64 Per Unit $125 80 $ 45 Selling price Variable expenses Contribution margin 366 Fixed expenses are $85,000 per month and the company is selling 2,700 units per month.

Answer 1

Answer- 1A)- The net operating income will decrease by $1800 (ie- $36500-$34700).

Explanation-

CONTRIBUTION FORMAT INCOME STATMENT
PRESENT SCENERIO
PARTICULARS		AMOUNT
		$
Sales	2700 units*$125 per unit	337500
Less- Variable costs	2700 units*$80 per unit	216000
Contribution		121500
Less- Fixed costs		85000
Net operating income		36500
CONTRIBUTION FORMAT INCOME STATMENT
PROPOSED SCENERIO
PARTICULARS		AMOUNT
		$
Sales	(2700 units*$125 per unit)+$20000	357500
Less- Variable costs	$357500*64%	228800
Contribution		128700
Less- Fixed costs	($85000+$9000)	94000
Net operating income		34700

1B)- The advertising budget should not be increased.

Answer-2a)-The net operating income will increase by $8100 (ie- $44600-$36500).

Explanation-

CONTRIBUTION FORMAT INCOME STATMENT
PRESENT SCENERIO
PARTICULARS		AMOUNT
		$
Sales	2700 units*$125 per unit	337500
Less- Variable costs	2700 units*$80 per unit	216000
Contribution		121500
Less- Fixed costs		85000
Net operating income		36500
CONTRIBUTION FORMAT INCOME STATMENT
PROPOSED SCENERIO
PARTICULARS		AMOUNT
		$
Sales	[2700 units*1.20]*$125 per unit)	405000
Less- Variable costs	3240 units*($80+$5)	275400
Contribution		129600
Less- Fixed costs		85000
Net operating income		44600

2b)-The higher quality component should be used.