Data for Hermann Corporation are shown below:
1-a. How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $5,000, the monthly sales volume increases by 100 units, and the total monthly sales increase by $9,000?
1-b. Should the advertising budget be increased?
2-a. Refer to the original data. How much will net operating income increase (decrease) per month if the company uses higher-quality components that increase the variable expense by $2 per unit and increase unit sales by 10%.
2-b. Should the higher-quality components be used?
Fixed expenses are $30,000 per month and the company is selling 2,000 units per month.
Increase in sales 9000
increase in contribution margin (9000×30%). 2700
Increase in fixed cost. 5000
|Net operating income Decreased by||2300|
|Should the advertisement Budget increased.||NO|
Increase in variable cost by 2.00
Increase units sales by 10%
|Increase in sales revenue (2000×0.10×90)||18000|
|Increase in variable cost (2000*0.10*65)+(2000*2)||17000|
|Increase in contribution margin||1000|
|Net operating income increased by||1000|
|Should the higher quality component be used||YES|
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