Question

# Data for Hermann Corporation are shown below: Per Unit Percent of Sales Selling price \$ 80...

Data for Hermann Corporation are shown below:

 Per Unit Percent of Sales Selling price \$ 80 100 % Variable expenses 44 55 Contribution margin \$ 36 45 %

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

Required:

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%

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

No, the advertising budget should not be increased as it will have negative impact on net operating income.

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