[The following information applies to the questions displayed below.] Fixed expe
ID: 2417617 • Letter: #
Question
[The following information applies to the questions displayed below.]
Fixed expenses are $81,000 per month and the company is selling 3,800 units per month.
The marketing manager argues that a $8,600 increase in the monthly advertising budget would increase monthly sales by $18,000. Calculate the increase or decrease in net operating income.
2-a.
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 20% per month. Calculate the change in total contribution margin.
[The following information applies to the questions displayed below.]
Data for Hermann Corporation are shown below:Explanation / Answer
Particulars
Existing
Mktng Mfr Proposal
Sales in Units
3,800
3,971
Sales Price
100%
105
105
Sales in $
399,000
417,000
Less:Variable Cost
60%
239,400
250,200
Total Contribution
40%
159,600
166,800
Less:Fixed Cost
81,000
81,000
Advertisement
8,600
Total Fixed Cost
81,000
89,600
Net Operating Income
78,600
77,200
Rank
I
II
1. a. Decrease in net operating income $1,400
b. No, Need not to increase advertisement expenditure as there is reduction in net operating income.
Particulars
Existing
Mgmt Proposal
Sales in Units
3,800
4,560
Sales Price
105
105
Less:Variable Cost
63
67
Contribution per unit
42
38
Total Contribution
159,600
173,280
Less:Fixed Cost
81,000
81,000
Net Operating Income
78,600
92,280
Rank
II
I
2. a) Change in Contribution margin=$173,280-$159,600=$13,680
b) yes ,there is increase in net operating income
Particulars
Existing
Mktng Mfr Proposal
Sales in Units
3,800
3,971
Sales Price
100%
105
105
Sales in $
399,000
417,000
Less:Variable Cost
60%
239,400
250,200
Total Contribution
40%
159,600
166,800
Less:Fixed Cost
81,000
81,000
Advertisement
8,600
Total Fixed Cost
81,000
89,600
Net Operating Income
78,600
77,200
Rank
I
II
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