Question

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Data for Hermann Corporation are shown below:

	Per Unit			Percent of Sales
Selling price	$	140		100%
Variable expenses		91		65%
Contribution margin	$	49		35%

   

Fixed expenses are $88,000 per month and the company is selling 3,000 units per month.

rev: 06_04_2020_QC_CS-205709, 06_18_2020_QC_CS-216765, 07_14_2020_QC_CS-216765

3.

Award: 0 out of 10.00 points

Required:
1-a.	The marketing manager argues that a $9,300 increase in the monthly advertising budget would increase monthly sales by $21,000. Calculate the increase or decrease in net operating income. (Round any unit calculations up to the nearest whole unit.)

      

1-b.	Should the advertising budget be increased?
	n/r

rev: 06_18_2019_QC_CS-159269, 03_26_2020_QC_CS-205709

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WorksheetDifficulty: 1 EasyLearning Objective: 05-04 Show the effects on net operating income of changes in variable costs, fixed costs, selling price, and volume.

4.

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2-a.	Refer to the original data. Management is considering using higher-quality components that would increase the variable expense by $6 per unit. The marketing manager believes that the higher-quality product would increase sales by 20% per month. Calculate the change in total contribution margin.

2-b.	Should the higher-quality components be used?
	n/r

Answer 1

1a
Increase in monthly sales	21000
X Contribution margin ratio	35%
Increase in Contribution margin	7350
Less: Advertising costs	9300
Decrease in in net operating income	1950
1b
No, the advertising budget should not be increased

2a
Current Contribution margin	147000	=3000*49
Revised sales units	3600	=3000*1.20
Revised Contribution margin per unit	43	=49-6
Revised Contribution margin	154800	=3600*43
Revised Contribution margin	154800
Less: Current Contribution margin	147000
Total contribution margin increases by	7800
2b
Yes, the higher-quality should components be used.