Question

Data for Hermann Corporation are shown below: Per Unit Percent of Sales Selling price $ 90...

Data for Hermann Corporation are shown below:

Per Unit Percent
of Sales
Selling price $ 90 100 %
Variable expenses 63 70
Contribution margin $ 27 30 %

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.

Homework Answers

Answer #1
Selling price 90 100%
Variable cost 63 70%
Contribution margin 27 30%
Fixed cost 30000
Sales units 2000

1.

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

2.

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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