The following information applies to the questions displayed below.] Data for He

Question

The following information applies to the questions displayed below.] Data for Hermann Corporation are shown below Per Unit $ 110 Percent of Sales 100% Selling price Variable expenses 7 70 Contribution margin 33 30% Fixed expenses are $82.,000 per month and the company is selling 3,500 units per month. 3. value: 0.50 points Required: nager argues that a $8,700 increase in the monthly advertising budget would increase monthly sales by $18,500. Calculate the increase or decrease in net operating income. 1-b. Should the advertising budget be increased? Yes No

Explanation / Answer

Answer 1-a.

Contribution Margin Ratio = 30%
Increase in Sales = $18,500
Increase in Fixed Expenses = $8,700

Increase (Decrease) in Net Operating Income = Increase in Sales * Contribution Margin Ratio - Increase in Fixed Expenses
Increase (Decrease) in Net Operating Income = $18,500 * 30% - $8,700
Increase (Decrease) in Net Operating Income = $5,550 - $8,700
Increase (Decrease) in Net Operating Income = -$3,150

Net Operating Income will decrease by $3,150

Answer 1-b.

No, advertising budget should not be increased.

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