Question

Data for Hermann Corporation are shown below:

	Per Unit			Percent of Sales
Selling price	$	105		100%
Variable expenses		63		60%
Contribution margin	$	42		40%

   

Fixed expenses are $81,000 per month and the company is selling 3,800 units per month.

1-a.	The marketing manager argues that a $8,600 increase in the monthly advertising budget would increase monthly sales by $18,000. Calculate the increase or decrease in net operating income.

      

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

Answer 1

Answer to Requirement 1-a.

Increase / (Decrease) in Net Operating Income = Increase in Contribution Margin – Increase in Fixed Cost
Increase in Contribution margin = $18,000 * 40% = $7,200
Increase / (Decrease) in Net Operating Income = $7,200 - $8,600
Decrease in Net Operating Income = $(1,400)

Answer to Requirement 1-b.

No, Advertising Budget should not be increased as it will decrease Net Operating Income by $1,400.