contestada

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?

Respuesta :

akiran007

Answer:

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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