Question

Data for Hermann Corporation are shown below: Selling price Variable expenses Contribution margin Percent of Per Unit Sales $ 80 1eex 5265 $ 28 3 5% Fixed expenses are $76,000 per month and the company is selling 4,600 units per month. Exercise 5-5 Part 1 advertising budget increases by $10,000 and Required: 1-a. How much will net operating income increase (decrease) per monthly sales increase by $25,000? 1-6. Should the advertising budget be increased?

Answer 1

1-a

Net profit or loss = (Sales X Contribution margin percentage) - Advertising cost

= ($25,000 X 35%) - $10,000

= -$1,250

The net operating income will decrease by $1,250 if monthly advertising budget is increased.

1-b

No. The monthly advertising budget should not be increased because the contribution from additional sales is less than increase in advertising costs and resulting in an increase in net operating loss.