Question & Answer: Data for Hermann Corporation are shown below: Fixed expenses are $76,000 per month and the company is…..

[The following Information applles to the questions displayed below Data for Hermann Corporatlon are shown below: Percent of Sales 100% 55% Per Unit $ 80 Selling price Varlable expenses Contribution margin $ 36 45% Fixed expenses are $76,000 per month and the company is selling 2,500 units per month. Required: a. The marketing manager argues that a $8,100 increase in the monthly advertising budget would increase monthly sales by $15,500. Calculate the increase or decrease in net operating income. Net operating income by b. 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 20% per month. Calculate the change in total contribution margin. Total contribution margin by

Data for Hermann Corporation are shown below: Fixed expenses are $76,000 per month and the company is selling 2.500 units per month. Required: a. The marketing manager argues that a $8, 100 increase in the monthly advertising budget would increase monthly sales by $15, 500. Calculate the increase or decrease in net operating income. b. 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 20% per month. Calculate the change in total contribution margin.

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Expert Answer

a.Increase in contribution=($15500*45%)=$6975

Less:increase in Fixed expenses=$8100

Hence net operating income would decrease by=$1125.

b.

Current contribution margin=(36*2500)=$90000

Contribution margin/iunit would be=($80-($44+4))=$32.

Hence total contribution margin would be=(32*(2500*120%)=$96000.

Hence Total contribution margin would increase by=($96000-$90000)=$6000.

 

 

 

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