Question

Lec Exercise 6-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume (L06-4) [The following information applies to the questions displayed below.) Data for Hermann Corporation are shown below: Selling price Variable expenses Contribution margin Per Unit S 85 51 S 34 Percent of Sales 1008 60 400 Fixed expenses are $77,000 per month and the company is selling 2,600 units per month, Exercise 6-5 Part 1 Required: 1-a. How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $8,200 and monthly sales increase by $15,300? 1-b. Should the advertising budget be increased?

Answer 1

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Excercise 6-5

2600 Units Sales $ 221,000 $ 85.00 Variable Expense $ 132,600 $ 51.00 Contribution Margin $ 88,400 $ 34.00 Fixed Expenses $ 77,000 Profit $ 11,400 % 100.00% 60.00% 40.00%

Part 1 -

2780 Units Sales $ 236,300 $ 85.00 Variable Expense $ 140,800 $ 50.65 Contribution Margin $ 95,500 $ 34.35 Fixed Expenses $ 77,000 Profit $ 18,500 % 100.00% 59.59% 40.41%

1.a. If the advertising expense increased and sales increased in the given figures then Net operating profit will be increased by $7,100.

1.b. Yes company should increased the Advertising Budget.

Part 2 -

3120 Units Sales $ 265,200 $ 85.00 Variable Expense $ 171,600 $ 55.00 Contribution Margin $ 93,600 $ 30.00 Fixed Expenses $ 77,000 Profit $ 16,600 % 100.00% 64.71% 35.29%

2.a If the company used higher quality components and sales increased in the given figures then Net operating profit will be increased by $5,200

2.b As compare to the 1st situation company may go for higher quality components.

Overall Judgement -

As compare to Part 1 company should go for increasing advertising budget.