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?

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

muslims control the north africa during the period of 1500 up

to 1800. they made a barrier to prevent further european exploration from

entering the africa from the north. however, the dutch ware still able to move

toward the interior with having south africa as one of the routes leading to

the east for trading with asia.