Question

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. [The following information applies to the questions displayed below.]   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. Required: 1-a. The marketing manager argues that a $9,300 increase in the monthly advertising budget would increase monthly sales by $21,500. Calculate the increase or decrease in net operating income.            1-b. Should the advertising budget be increased?         Yes   No

Answer 1

Answer:-1a)- Net operating income will decrease by $1775 (ie-$59000-$57225)

1b)- Hence advertising budget should not be increased.

Explanation:-

Hermann Corporation
Statement of Net opreating income
Particlulars	Current situation	Sale with additional advertising budget
	$	$
Sales value	3000 units*$140 per unit =420000	420000+21500=441500
Less:- Variable costs	3000 units*$91 per unit =273000	441500*65% =286975
Contribution	147000	154525
Less:- Fixed costs	88000	88000+9300 = 97300
Net opreating income	59000	57225