Question

Data for Hermann Corporation are shown below:

Fixed expenses are $83,000 per month and the company is selling 2,500 units per month.

	Per unit	Percent of sales
Per Unit Percent of Sales Selling price	$115	100%
Variable expenses	$69	60%
Contribution margin	$46	40%

1-a. How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $8,800 and monthly sales increase by $17,250?

Answer 1

1-a. Calculation of increase (decrease) in net operating income if monthly advertising budget increases by $8,800 and monthly sales increase by $17,250 :

Increase (decrease) in net operating income = (Increase in sales * Contribution margin ratio) - Increase in advertising budget

= ( $ 17,250 * 40% ) - $ 8,800

= $ 6,900 - $ 8,800

= ( $ 1,900 )

If Hermann Corporation increase its advertising budget it will result in decrease in net operating income by $ 1900

Note:

Contribution margin ratio = Contribution margin / Sales

= $ 46 / $ 115

= 40% ( It is given in question )