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Data for Hermann Corporation are shown below:

Per unit Percent of Sales
Selling price $90 100%
Variable expenses 63 70%
Contribution margin $27 30%

Fixed expenses are $30,000 per month and the company is selling 2,000 units per month.

Requirement 1:
(a) Calculate the increase or decrease in net operating income if a $5,000 increase in the monthly advertising budget would increase monthly sales by $9,000.
(b) Should the advertising budget be increased as suggested in the requirement (a) above?
Requirement 2:
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 $2 per unit and increase unit sales by 10%?
Should the higher-quality components be used?

Answer :

facundobuzzetti

Answer:

Instructions are listed below.

Explanation:

Giving the following information:

Per unit Percent of Sales

Selling price $90

Variable expenses 63

Contribution margin $27

Fixed expenses are $30,000 per month and the company is selling 2,000 units per month.

First, we need to calculate the actual income:

Sales= 2,000*90= 180,000

Variable cost= 2,000*63= (126,000)

Contribution margin= 54,000

Fixed costs= (30,000)

Net operating profuit= 24,000

A) Effect on income= increase in sales - increase in costs

Effect on income= 100units* (90 - 63) - 5,000= -2,300

B) The effect of increasing the advertising budget is not positive. Income suffers a decrease. It is not profitable.

C) New sales= 2,200

New variable cost= 65

Effect on income= 2,200*(90 - 65) - 30,000= 25,000

The change in higher-quality components should be made. It increases the profit by $1,000

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