Question

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?

Answer 1

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.