Question

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Data for Hermann Corporation are shown below:

	Per Unit				Percent of Sales
Selling price	$	60				100	%
Variable expenses		39				65
Contribution margin	$	21				35	%

Fixed expenses are $72,000 per month and the company is selling 4,200 units per month.

Required:

1-a. How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $9,600 and monthly sales increase by $23,000?

1-b. Should the advertising budget be increased?

Answer 1

1a. | Less Sales Variable Expense Contribution Margin Fixed Expenses Net Operating Income without Increase 252,000 163,800 88,200 72,000 16,200 $ $ $ $ $ with increase | 275,000 $ 178,750 $ 96,250 $ 81,600 $ 14,650 $ Difference 23,000 14,950 8,050 9,600 (1,550) Less Operating income will decrease by 1550 if advertising expense is increased by 9600. 1b. No the advertising budget should not be increased as it will lead to decrease in operating income. Working: Sales Variable Expense Fixed Expenses Net Operating Income Without Increase 60 x 4200= 252000 252000 x 65% = 163800 72000 With Increase 252000 + 23000= 275000 275000 x 65%=178750 72000 +9600=81600 Difference 275000 - 252000 178750 - 163800 81600 - 72000 14650 - 16200