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

Question

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

   

Fixed expenses are $88,000 per month and the company is selling 3,000 units per month.

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.

      

No

2-a.

Refer to the original data. Management is considering using higher-quality components that would increase the variable expense by $6 per unit. The marketing manager believes that the higher-quality product would increase sales by 20% per month. Calculate the change in total contribution margin.

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

Data for Hermann Corporation are shown below:

Explanation / Answer

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

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

Explanation:-

1a)- The contribution margin will increase by $66000 (ie-$213000-$147000)

1b)- Hence high quality components should be used.

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

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