Question
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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.
Required:
1-a. How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $5,000, the monthly sales volume increases by 100 units, and the total monthly sales increase by $9,000?
1-b. Should the advertising budget be increased?
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.
Required:
1-a. How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $5,000, the monthly sales volume increases by 100 units, and the total monthly sales increase by $9,000?
1-b. Should the advertising budget be increased?
Answers
GPT-4o mini
To analyze how much net operating income will increase (or decrease) with the proposed changes, we will break down the effects step by step.
### Given Data:
- Selling Price per Unit: $90
- Variable Expenses per Unit: $63
- Contribution Margin per Unit: $27 (which is calculated as
\[ \text{Selling Price} - \text{Variable Expenses} = 90 - 63 = 27 \])
- Contribution Margin Ratio: 30% (which is calculated as
\[ \frac{27}{90} = 0.30 \])
- Fixed Expenses: $30,000 per month
- Current Monthly Sales Volume: 2,000 units
### Changes:
- Increase in advertising budget: $5,000
- Increase in sales volume: 100 units
- Increase in total monthly sales: $9,000 (this is given, and it should be checked against the contribution margin)
### 1-a. Effect on Net Operating Income:
**Increase in Sales Volume:**
- New sales volume = 2,000 units + 100 units = 2,100 units
- Contribution margin for the increase in sales volume = 100 units * Contribution Margin per Unit
- Calculation:
\[ \text{Contribution Margin from Additional Sales} = 100 \times 27 = 2,700 \]
**Total Sales Increase:**
- If the total sales increase by $9,000, we can also calculate the contribution margin from this increase:
- Contribution margin can also be calculated from sales increase using contribution margin ratio:
- Contribution Margin from Sales Increase = $9,000 * Contribution Margin Ratio
- Calculation:
\[ \text{Contribution Margin from Sales Increase} = 9,000 \times 0.30 = 2,700 \]
**Total Contribution Margin Increase:**
- Total increase in contribution margin from the increase in sales volume and from the sales increase is:
\[ \text{Total Contribution Margin Increase} = 2,700 + 2,700 = 5,400 \]
**Increased Advertising Cost:**
- The increase in advertising costs is $5,000, so the effect on net operating income will be:
- \[ \text{Net Change in Operating Income} = \text{Total Contribution Margin Increase} - \text{Increased Advertising Cost} \]
- Calculation:
\[ \text{Net Change in Operating Income} = 5,400 - 5,000 = 400 \]
### Answer for 1-a:
**Net Operating Income will increase by $400 per month** if the advertising budget is increased.
### 1-b. Should the advertising budget be increased?
Given the analysis, the net operating income would increase by $400 per month with the proposed increase in the advertising budget.
Thus, the recommendation is:
### Answer for 1-b:
**Yes, the advertising budget should be increased, as it results in an increase in net operating income.**
### Given Data:
- Selling Price per Unit: $90
- Variable Expenses per Unit: $63
- Contribution Margin per Unit: $27 (which is calculated as
\[ \text{Selling Price} - \text{Variable Expenses} = 90 - 63 = 27 \])
- Contribution Margin Ratio: 30% (which is calculated as
\[ \frac{27}{90} = 0.30 \])
- Fixed Expenses: $30,000 per month
- Current Monthly Sales Volume: 2,000 units
### Changes:
- Increase in advertising budget: $5,000
- Increase in sales volume: 100 units
- Increase in total monthly sales: $9,000 (this is given, and it should be checked against the contribution margin)
### 1-a. Effect on Net Operating Income:
**Increase in Sales Volume:**
- New sales volume = 2,000 units + 100 units = 2,100 units
- Contribution margin for the increase in sales volume = 100 units * Contribution Margin per Unit
- Calculation:
\[ \text{Contribution Margin from Additional Sales} = 100 \times 27 = 2,700 \]
**Total Sales Increase:**
- If the total sales increase by $9,000, we can also calculate the contribution margin from this increase:
- Contribution margin can also be calculated from sales increase using contribution margin ratio:
- Contribution Margin from Sales Increase = $9,000 * Contribution Margin Ratio
- Calculation:
\[ \text{Contribution Margin from Sales Increase} = 9,000 \times 0.30 = 2,700 \]
**Total Contribution Margin Increase:**
- Total increase in contribution margin from the increase in sales volume and from the sales increase is:
\[ \text{Total Contribution Margin Increase} = 2,700 + 2,700 = 5,400 \]
**Increased Advertising Cost:**
- The increase in advertising costs is $5,000, so the effect on net operating income will be:
- \[ \text{Net Change in Operating Income} = \text{Total Contribution Margin Increase} - \text{Increased Advertising Cost} \]
- Calculation:
\[ \text{Net Change in Operating Income} = 5,400 - 5,000 = 400 \]
### Answer for 1-a:
**Net Operating Income will increase by $400 per month** if the advertising budget is increased.
### 1-b. Should the advertising budget be increased?
Given the analysis, the net operating income would increase by $400 per month with the proposed increase in the advertising budget.
Thus, the recommendation is:
### Answer for 1-b:
**Yes, the advertising budget should be increased, as it results in an increase in net operating income.**