Data for Hermann Corporation are shown below:
|Per Unit||Percent of Sales|
Fixed expenses are $76,000 per month and the company is selling 2,500 units per month.
rev: 06_04_2020_QC_CS-205709, 06_18_2020_QC_CS-216765, 07_14_2020_QC_CS-216765
1-a. How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $8,100 and monthly sales increase by $14,400?
1-b. Should the advertising budget be increased?
Contribution Margin Ratio = 45%
Answer to Requirement A:
Increase in Fixed Expenses = $8,100
Increase in Sales = $14,400
Increase in Net Operating Income = Increase in Sales *
Contribution Margin Ratio - Increase in Fixed Expenses
Increase in Net Operating Income = $14,400 * 45% - $8,100
Increase in Net Operating Income = $6,480 - $8,100
Increase in Net Operating Income = -$1,620
Answer to Requirement B:
No, the advertising budget should not be increased as it will have negative impact on net operating income.
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