Question

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

Data for Hermann Corporation are shown below:

	Per Unit			Percent of Sales
Selling price	$	80		100%
Variable expenses		44		55%
Contribution margin	$	36		45%

   

Fixed expenses are $76,000 per month and the company is selling 2,500 units per month.

2.

value:
1.25 points

Required information

Required:
1-a.	The marketing manager argues that a $8,100 increase in the monthly advertising budget would increase monthly sales by $15,500. Calculate the increase or decrease in net operating income.

      

1-b.	Should the advertising budget be increased?
	Yes No

Answer 1

• All working forms part of the answer
• Amounts are in $
• Working for Current Scenario

A	Selling price per unit	$80
B	variable expenses per unit	$44
C=A-B	Contribution Margin per unit	$36
D	Units	2500
E=C x D	Total contribution margin	$90000
F	Fixed Expenses	$76000
G=E-F	Net Income	$14000

• Effect of Marketing Manager on Net Income

A=2500 units x $80	Current Sales	$200000
B (given)	Expected increase	$15500
C=A+B	New expected Sales	$215500
D=C x 55%	Variable expenses (55%)	$118525
E=C-D	Contribution margin	$96975
F	Old Fixed Cost	$76000
G	New Fixed cost (Additional)	$8100
H=E-F-G	New Net Income	$12875
I	Current Net Income (calculated above)	$14000
J=H-I	Increase/(Decrease) in Net operating Income	$(1125)

Hence, the income DECREASES by $1125.

• Answer 1(b)---- NO

Since, the increasing cost of budget is less than marginal revenue (contribution), budgeted advertising expenses should NOT BE INCREASED.