# Question: Data for Hermann Corporation are shown below: Â Per unit Perce –Free Chegg Question Answer

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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. |

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? |

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## Answer

## Step-by-step

### Step 1 of 3

1.a)

Calculate increase or decrease in net operating income.

\begin{array}{c}\\\left. \begin{array}{l}\\{\rm{Increase or decrease in}}\\\\{\rm{ net operating income}}\\\end{array} \right\}{\rm{ = }}\left( \begin{array}{l}\\{\rm{Original net income }}\\\\ – {\rm{ }}\left( \begin{array}{l}\\{\rm{Net operating income after }}\\\\{\rm{increasing the sales and }}\\\\{\rm{advertisement expense}}\\\end{array} \right)\\\end{array} \right)\\\\ = \$ {\rm{24,000 }} – {\rm{ \$ 21,700}}\\\\ = \;\$ 2,300\\\end{array}Increaseordecreaseinnetoperatingincome⎭⎪⎪⎬⎪⎪⎫=⎝⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎛Originalnetincome−⎝⎜⎜⎜⎜⎜⎜⎛Netoperatingincomeafterincreasingthesalesandadvertisementexpense⎠⎟⎟⎟⎟⎟⎟⎞⎠⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎞=$24,000−$21,700=$2,300

Therefore, the cost of additional advertisement expense will lead to a $2,300 decrease in net operating income.

Working note:

Calculate original net income.

\begin{array}{c}\\{\rm{Original net income = }}\left( \begin{array}{l}\\\left( \begin{array}{l}\\{\rm{Selling price per unit }}\\\\ \times {\rm{ Number of units sold}}\\\end{array} \right){\rm{ }}\\\\ – {\rm{ }}\left( \begin{array}{l}\\{\rm{Variable expenses per unit }}\\\\ \times {\rm{ Number of units sold}}\\\end{array} \right){\rm{ }}\\\\ – {\rm{ Fixed expenses}}\\\end{array} \right){\rm{ }}\\\\{\rm{ = }}\left( \begin{array}{l}\\\left( {{\rm{\$ 90 }} \times {\rm{ 2,000}}} \right){\rm{ }} – {\rm{ }}\left( {{\rm{\$ 63}}\; \times \;{\rm{2,000}}} \right)\\\\{\rm{ }} – {\rm{ \$ 30,000}}\\\end{array} \right){\rm{ }}\\\\{\rm{ = }}\left( {{\rm{\$ 180,000}}\; – \;{\rm{\$ 126,000}}\; – \;{\rm{\$ 30,000}}} \right)\\\\{\rm{ = \$ 24,000}}\\\end{array}Originalnetincome=⎝⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎛⎝⎜⎜⎛Sellingpriceperunit×Numberofunitssold⎠⎟⎟⎞−⎝⎜⎜⎛Variableexpensesperunit×Numberofunitssold⎠⎟⎟⎞−Fixedexpenses⎠⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎞=⎝⎜⎜⎛($90×2,000)−($63×2,000)−$30,000⎠⎟⎟⎞=($180,000−$126,000−$30,000)=$24,000

Calculate additional units sold.

\begin{array}{c}\\{\rm{Additional units sold = }}\frac{{{\rm{Increase in sales}}}}{{{\rm{Selling price per unit }}}}\\\\{\rm{ = }}\frac{{{\rm{\$ 9,000}}}}{{{\rm{\$ 90}}}}{\rm{ }}\\\\{\rm{ = 100 units}}\\\end{array}Additionalunitssold=SellingpriceperunitIncreaseinsales=$90$9,000=100units

Calculate net operating income after increasing the sales and advertisement expense.

\begin{array}{c}\\\left. \begin{array}{l}\\{\rm{Net operating income }}\\\\{\rm{after increasing the sales }}\\\\{\rm{and advertisement expense}}\\\end{array} \right\}{\rm{ = }}\left( \begin{array}{l}\\\left( \begin{array}{l}\\{\rm{Selling price per unit }}\\\\{\rm{ \times Number of units sold}}\\\end{array} \right){\rm{ }}\\\\ – {\rm{ }}\left( \begin{array}{l}\\{\rm{Variable expenses per unit }}\\\\{\rm{ \times Number of units sold}}\\\end{array} \right){\rm{ }}\\\\ – {\rm{ }}\left( {{\rm{Fixed expenses}}\;{\rm{ + Advertisement expense}}} \right)\\\end{array} \right){\rm{ }}\\\\{\rm{ = }}\left( \begin{array}{l}\\\left( {{\rm{\$ 90}}\;{\rm{ \times }}\;\left( {{\rm{2,000 + }}\;{\rm{100}}} \right)} \right)\; – \;\left( {{\rm{\$ 63}}\;{\rm{ \times }}\;\left( {{\rm{2,000}}\;{\rm{ + }}\,{\rm{100}}} \right)} \right)\\\\{\rm{ }} – {\rm{ \$ 35,000}}\\\end{array} \right){\rm{ }}\\\\{\rm{ = }}\left( {{\rm{\$ 189,000}}\; – \;{\rm{\$ 132,300}}\; – \;{\rm{\$ 35,000}}} \right)\\\\{\rm{ = \$ 21,700}}\\\end{array}Netoperatingincomeafterincreasingthesalesandadvertisementexpense⎭⎪⎪⎪⎪⎪⎪⎬⎪⎪⎪⎪⎪⎪⎫=⎝⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎛⎝⎜⎜⎛Sellingpriceperunit×Numberofunitssold⎠⎟⎟⎞−⎝⎜⎜⎛Variableexpensesperunit×Numberofunitssold⎠⎟⎟⎞−(Fixedexpenses+Advertisementexpense)⎠⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎞=⎝⎜⎜⎛($90×(2,000+100))−($63×(2,000+100))−$35,000⎠⎟⎟⎞=($189,000−$132,300−$35,000)=$21,700Part 1.a

**Cost of additional advertisement expense will lead to a $2,300 decrease in net operating** **income.****Explanation** | Common mistakes | Hint for next step

Sales revenue minus variable and fixed expenses is the net operating income of the company. Calculated original net operating income is $24,000 and net operating income after increasing the sales and advertisement expense $21,700. Here, original net income is higher than the net operating income after increasing the sales and advertisement expense. Hence, the cost of additional advertisement expense will lead to a $2,300 decrease in net operating income.

### Step 2 of 3

1.b)

No. The cost of additional advertisement will leads to the decrease in net operating income. Therefore, the company should not continue the advertising.Part 1.b

**No. Additional advertisement expense will leads to the decrease in net operating income.****Explanation** | Hint for next step

Here, original net operating income is more than the net operating income after increasing the sales and advertisement expense. Therefore, the cost of additional advertisement expense will lead to a $2,300 decrease in net operating income. Hence, the additional advertisement expense will leads to the decrease in net operating income.

### Step 3 of 3

2)

Calculate increase of decrease in net operating income.

\begin{array}{c}\\\left. \begin{array}{l}\\{\rm{Increase or decrease in}}\\\\{\rm{ net operating income}}\\\end{array} \right\}{\rm{ = }}\left( \begin{array}{l}\\\left( \begin{array}{l}\\{\rm{Net operating income}}\\\\{\rm{ after increasing the }}\\\\{\rm{sales and variable cost}}\\\end{array} \right){\rm{ }}\\\\ – {\rm{ Original net income}}\\\end{array} \right)\\\\ = \$ {\rm{25,000 }} – {\rm{ \$ 24,000}}\\\\ = \;\$ 1,000\\\end{array}Increaseordecreaseinnetoperatingincome⎭⎪⎪⎬⎪⎪⎫=⎝⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎛⎝⎜⎜⎜⎜⎜⎜⎛Netoperatingincomeafterincreasingthesalesandvariablecost⎠⎟⎟⎟⎟⎟⎟⎞−Originalnetincome⎠⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎞=$25,000−$24,000=$1,000

Therefore, using the higher quality component will increase the income by $1,000.

Working note:

Calculate additional unit sales.

\begin{array}{c}\\{\rm{Additional unit sales = }}\left( {{\rm{Original sales units + }}\left( {{\rm{Original sales units }} \times {\rm{ 10\% }}} \right)} \right){\rm{ }}\\\\{\rm{ = }}\left( {{\rm{2,000 units + }}\left( {{\rm{2,000 units }} \times {\rm{ 10\% }}} \right)} \right){\rm{ }}\\\\{\rm{ = 2,000 units + 200 units }}\\\\{\rm{ = 2,200 units }}\\\end{array}Additionalunitsales=(Originalsalesunits+(Originalsalesunits×10%))=(2,000units+(2,000units×10%))=2,000units+200units=2,200units

Calculate net operating income after increasing the sales and variable cost.

\begin{array}{c}\\\left. \begin{array}{l}\\{\rm{Net operating income}}\\\\{\rm{ after increasing the }}\\\\{\rm{sales and variable cost}}\\\end{array} \right\}{\rm{ = }}\left( \begin{array}{l}\\\left( \begin{array}{l}\\{\rm{Selling price per unit }}\\\\ \times {\rm{ Number of units sold}}\\\end{array} \right){\rm{ }}\\\\ – {\rm{ }}\left( \begin{array}{l}\\{\rm{Variable expenses per unit }}\\\\ \times {\rm{ Number of units sold}}\\\end{array} \right){\rm{ }}\\\\ – {\rm{ Fixed expenses}}\\\end{array} \right){\rm{ }}\\\\{\rm{ = }}\left( \begin{array}{l}\\\left( {{\rm{\$ 90 }} \times {\rm{ }}\left( {{\rm{2,000 + 200}}} \right)} \right){\rm{ }}\\\\ – {\rm{ }}\left( {\left( {{\rm{\$ 63 + \$ 2}}} \right)\; \times \;\left( {{\rm{2,000 + 200}}} \right)} \right)\\\\{\rm{ }} – {\rm{ \$ 30,000}}\\\end{array} \right){\rm{ }}\\\\{\rm{ = }}\left( {{\rm{\$ 198,000}}\; – \;{\rm{\$ 143,000}}\; – \;{\rm{\$ 30,000}}} \right)\\\\{\rm{ = \$ 25,000}}\\\end{array}Netoperatingincomeafterincreasingthesalesandvariablecost⎭⎪⎪⎪⎪⎪⎪⎬⎪⎪⎪⎪⎪⎪⎫=⎝⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎜⎛⎝⎜⎜⎛Sellingpriceperunit×Numberofunitssold⎠⎟⎟⎞−⎝⎜⎜⎛Variableexpensesperunit×Numberofunitssold⎠⎟⎟⎞−Fixedexpenses⎠⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎟⎞=⎝⎜⎜⎜⎜⎜⎜⎛($90×(2,000+200))−(($63+$2)×(2,000+200))−$30,000⎠⎟⎟⎟⎟⎟⎟⎞=($198,000−$143,000−$30,000)=$25,000Part 2

**Higher quality component should be used.****Explanation** | Common mistakes

Calculated original net operating income is $24,000. Using of higher quality component will increases the variable cost per unit by $2 and increases the sales by 10%. Therefore, the revised sales units are 2,200 units and revised variable expenses are $65. Therefore, the calculated net operating income after using the higher quality component is $25,000. Here, original net operating income is less than the net income after using the higher quality components. Hence, using the higher quality component will increase the income by $1,000. Therefore, the higher quality component should be used.

### Answer

Part 1.a

**Cost of additional advertisement expense will lead to a $2,300 decrease in net operating** **income.**Part 1.b

**No. Additional advertisement expense will leads to the decrease in net operating income.**Part 2

**Higher quality component should be used.**