Question

[The following information applies to the questions displayed below.]

Data for Hermann Corporation are shown below:

Fixed expenses are $82,000 per month and the company is selling 3,500 units per month.

	Per Unit				Percent of Sales
Selling price	$	110				100	%
Variable expenses	$	77				70	%
Contribution margin	$	33				30	%

Fixed expenses are $82,000 per month and the company is selling 3,500 units per month.

1-a. How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $8,700 and monthly sales increase by $19,800?

2a. Refer to the original data. How much will net operating income increase (decrease) per month if the company uses higher-quality components that increase the variable expense by $5 per unit and increase unit sales by 20%.

Answer 1

Hermann Corporation

1a) net operating income Increase/(decrease) = Increase in sales × contribution margin ratio - Increased fixed cost (advertising cost)

= 19,800 × 30% - 8,700

= $ 5,940 - $ 8,700

= $ 2,760 decrease in net operating income per month.

Original data :

Net operating income = Selling units (selling price - variable cost) - fixed cost

= 3,500 × 33 - 82,000

= 115,500 - 82,000

= $ 33,500 per month

2a) Net operating income = (3,500×120%)×(33-5)-82,000

= 4,200 units × 28 - $ 82,000

= 117,600 - 82,000 = $ 35,600 per month

Net income in operating income would be $ 2,100 per month (35,600 - 33,500)