Data for Hermann Corporation are shown below:Per unit Percent of SalesSelling price $90 100%Variable expenses 63 70%Contribution margin $27 30%Fixed expenses are $30,000 per month and the company is selling 2,000 units per month. Requirement 1: (a) Calculate the increase or decrease in net operating income if a $5,000 increase in the monthly advertising budget would increase monthly sales by $9,000. (b) Should the advertising budget be increased as suggested in requirement 1 (a) above? Requirement 2:Refer to the original data. Management is considering using higher-quality components that would increase the variable cost by $2 per unit. The marketing manager believes the higher-quality product would increase sales by 10% per month. Should the higher-quality components be used?

Question

Business

Leo Wong

13 June, 21:31

Data for Hermann Corporation are shown below:Per unit Percent of SalesSelling price $90 100%Variable expenses 63 70%Contribution margin $27 30%Fixed expenses are $30,000 per month and the company is selling 2,000 units per month. Requirement 1: (a) Calculate the increase or decrease in net operating income if a $5,000 increase in the monthly advertising budget would increase monthly sales by $9,000. (b) Should the advertising budget be increased as suggested in requirement 1 (a) above? Requirement 2:Refer to the original data. Management is considering using higher-quality components that would increase the variable cost by $2 per unit. The marketing manager believes the higher-quality product would increase sales by 10% per month. Should the higher-quality components be used?

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Answers (1)

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Denzel Bird · Answer 1

Answers are given below.

Explanation:

1-a : current net operating income: = (Sales x cm) - Fixed Expenses

= (2000 x 27) - 30000 = 24000

New Sales:

(90x 2000) + 9000=189000

Contribution Margin: = 18700

189000 * 30% = 56700

New net operating income: 56700 - (30000+5000)

= 21700

Decrease in net operating income = 2300

1-b = No.