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

Question

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

Data for Hermann Corporation are shown below:

    Per Unit     Percent
of Sales
Selling price   $   55        100%
Variable expenses      33        60%
   
Contribution margin   $   22        40%
   

Fixed expenses are $71,000 per month and the company is selling 4,100 units per month.
1.value:
2.50 pointsRequired information
Required:
1-a.
The marketing manager argues that a $9,500 increase in the monthly advertising budget would increase monthly sales by $22,500. Calculate the increase or decrease in net operating income.
      
  

1-b.   Should the advertising budget be increased?
      
   
   Yes
   No
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2.value:
2.50 pointsRequired information
2-a.
Refer to the original data. Management is considering using higher-quality components that would increase the variable expense by $4 per unit. The marketing manager believes that the higher-quality product would increase sales by 25% per month. Calculate the change in total contribution margin.
      
   


2-b.   Should the higher-quality components be used?
      
   
   Yes
   No

Garrison 15e Recheck 2014-12-17
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Explanation / Answer

1 (a) Given,

Contribution margin per unit= $22

Therefore, Initial net income = Contribution margin per unit * No. of units produced - Fixed cost

= $22 * 4,100 - $71,000

= $19,200

Change in Net income after advertising measure = Contribution margin percent * Additional sales - Adverstising budget

= 40% * $22,500 - $9,500

=-$500

Therefore, the net income would decrease by $500.

1 (b) No. Since the increase in budget would lead to decrease in net income.

2 (a) New contribution margin = (Increased no. of units sold * Selling price per unit - Increased variable cost per unit * Increased no. of units sold) / Initial no. of units sold

= ((100% + 25%) *4,100 * $55 - ($33 + $4) * (100% + 25%) *4,100) / 4,100

= $22.50

Therefore, the contribution margin would increase by = New contribution margin - Initial contribution margin

= $22.50 - $22.00

= $0.50

2 (b) Yes. Since the contribution margin would increase which impact the net income favourably.

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