Question

Data for Hermann Corporation are shown below:

	Per Unit				Percent of Sales
Selling price	$	100				100	%
Variable expenses		61				61
Contribution margin	$	39				39	%

Fixed expenses are $80,000 per month and the company is selling 3,700 units per month.

Required:

1-a. How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $8,500 and monthly sales increase by $17,500?

1-b. Should the advertising budget be increased?

Answer 1

Answer:-1)-The net operating income will decrease per month by $1675 (ie-$64300-$62625).

2)-The advertising budget should not be increased due to decrease in net operating income of $1675.

Explanation:-

Hermann Corporation
Operating income
Current Scenerio
Particulars		Amount
		$
Sales	3700 unit*$100 per unit	370000
Less:- Variable cost	3700 unit*$61 per unit	225700
Contribution		144300
Less:- Fixed costs		80000
Net operating income		64300
Hermann Corporation
Operating income
Proposed Scenerio
Particulars		Amount
		$
Sales	(3700 unit*$100 per unit)+$17500	387500
Less:- Variable cost	$387500*61%	236375
Contribution		151125
Less:- Fixed costs		80000
Less:- Advertising expenses		8500
Net operating income		62625