Data for Hermann Corporation are shown below: Per unit Percent of Sales Selling
ID: 2428062 • Letter: D
Question
Data for Hermann Corporation are shown below:Per unit Percent
of Sales
Selling 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.
20.value:
6 points
You did NOT receive full credit for this question in previous attempt.
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 $9,000. (Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)
Net operating income $
(b) Should the advertising budget be increased as suggested in requirement 1(a) above?
Explanation / Answer
a) Current Income CM - $27(2,000) = $54,000 Fixed Expenses = (30,000) NI = $24,000 If you increase advertising by $5,000 and sales increases by $9,000, the following will occur. Fixed Expenses = (35,000) You then, have to take the CM of the Sales = $9,000*.3 = $2,700. There would only be a $2,700 increase in CM. Then re-do the above: CM - $27(2,000) + 2,700 = $54,000 + 2,700 = $56,700 Fixed Expenses = (35,000) NI = $21,700 Therefore, we have a decrease of NI by: (21,700)-(24,000) = $2,300 b) It should not be increased as suggested in the requirement above because you make less operating income.
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