Question

[The following information applies to the questions displayed below.] Data for Hermann Corporation are shown below: Per Unit $ 125 Percent of Sales 100% 64% Selling price Variable expenses 80 Contribution margin $ 45 36% Fixed expenses are $85,000 per month and the company is selling 2,700 units per month. 3. value: 10.00 points Required: 1-a. The marketing manager argues that a $9,000 increase in the monthly advertising budget would increase monthly sales by $20,000. Calculate the increase or decrease in net operating income. Net operating income decreases by $ 1,800

Answer 1

Answer

• Requirement 1 [a]

Change in Net Operating Income = ($20000 increase in sale x 36% CM ratio) - $ 9000 additional fixed cost
= 7200 – 9000
= $ 1800

>Net Operating Income DECREASES by $ 1800.

• Requirement 1 [b]
  NO, advertising budget should not be increased, because Net Operating income will DECREASE.
• Working for Requirement 2 [a]

Increase in Variable expense by $ 5 = Decrease in Contribution margin by $ 5
>New contribution margin per unit = $ 45 – 5 = $ 40
>Current sale = 2700 units
>Increased sale = 2700 + 20%= 3240 units

• Requirement 2 [a]
  Total contribution margin increase (decrease) = (3240 units x $ 40) – (2700 units x $ 45)
  = 129600 – 121500
  = $ 8100

>Total Contribution margin INCREASES by $ 8100

• Requirement 2 [b]
  YES, higher component should be used, because Contribution margin in totality is increasing.