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.
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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