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Data for Hermann Corporation are shown below: Per Unit Percent of Sales Selling price $ 80...

Data for Hermann Corporation are shown below: Per Unit Percent of Sales Selling price $ 80 100 % Variable expenses 44 55 Contribution margin $ 36 45 % Fixed expenses are $76,000 per month and the company is selling 2,500 units per month. Garrison 16e Rechecks 2017-05-02 Exercise 5-5 Part 1 Required: 1-a. How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $8,100 and monthly sales increase by $15,500? 1-b. Should the advertising budget be increased?

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Answer #1
1-a. Increase ( Decrease ) in net operating income = ( Increase in sales * Contribution margin ratio ) - Increase in advertising budget = ( 15500 * 45% ) - 8100 (1125)
Net operating income Decreases by 1125
1-b. Should the advertising budget be increased?
Answer : No
Reason : As increasing the advertising budget will result in decrease in net operating income by 1125
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