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6 July, 03:14

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.

net operating income:?

(b) Should the advertising budget be increased as suggested in requirement 1 (a) above?

Requirement 2:

Refer to the original data. Management is considering using higher-quality components that would increase the variable cost by $2 per unit. The marketing manager believes the higher-quality product would increase sales by 10% per month. Should the higher-quality components be used?

+1
Answers (1)
  1. 6 July, 03:42
    0
    a) We get $28000 Net Profit if we use advertising expense of $ 5000

    b) Yes the higher components should be used as they increase the net profit by $42000 - $24000 = $ 18000

    Explanation:

    a) The difference between the earlier and later net profit is of $ 4000.

    We get $ 24000 Net Profit if we do not use advertising expense and $ 28000 if we use advertising expense of $ 5000

    Hermann Corporation

    Per unit Percent Total

    Sales

    Selling price $94.5 100% 189,000

    Variable expenses 63 67% 126,000

    Contribution margin $27 33% 63000

    Fixed expenses $30,000

    Advertising Expenses $ 5000

    Net Profit $ 28000

    Hermann Corporation

    Per unit Percent Total

    Sales

    Selling price $90 100% 180,000

    Variable expenses 63 70% 126,000

    Contribution margin $27 30% 54000

    Fixed expenses $30,000

    Net Profit $ 24000

    b) Yes the higher components should be used as they increase the net profit by $42000 - $24000 = $ 18000

    Hermann Corporation

    Per unit Percent Total

    Sales

    Selling price $99 100% 198,000

    Variable expenses 65 66% 126,000

    Contribution margin $27 44% 72000

    Fixed expenses $30,000

    Net Profit $ 42,000
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