Data for Hermann Corporation are shown below: Fixed expenses are $74,000 per mon

Question

Data for Hermann Corporation are shown below:

Fixed expenses are $74,000 per month and the company is selling 4,400 units per month.

1. The marketing manager argues that a $9,800 increase in the monthly advertising budget would increase monthly sales by $24,000. Calculate the increase or decrease in net operating income.

Net operating income decreases by ___________

2. Refer to the original data. Management is considering using higher-quality components that would increase the variable expense by $4 per unit. The marketing manager believes that the higher-quality product would increase sales by 25% per month. Calculate the change in total contribution margin.

Total contribution margin increases by ___________

Per Unit Percent
of Sales Selling price $ 70 100% Variable expenses 49 70% Contribution margin $ 21 30%

Explanation / Answer

1.

Hence decrease in Net operating income=(18400-15800)=$2600

2.

Hence increase in Contribution margin=(93500-92400)=$1100

Current Proposed Sales (70*4400)=$308000 (308000+24000)=$332000 Variable expenses (49*4400)=$215600 (332000*0.7)=$232400 Contribution margin $92400 $99600 Fixed expenses 74000 (74000+9800)=$83800 Net operating income $18400 $15800

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