Check m Required information Exercise 6-5 Changes in Variable Costs, Fixed Costs
ID: 2332713 • Letter: C
Question
Check m Required information Exercise 6-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume [LO6-4] The following information applies to the questions displayed below. Data for Hermann Corporation are shown below: Percent of Sales 1008 60 40B Per UnitSa Selling price Variable expenses Contribution margin 95 57 $ 38 Fixed expenses are $79,000 per month and the company is selling 3,600 units per month. Exercise 6-5 Part 1 Required: 1-a. How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $8,400 and monthly sales increase by $17,000? 1-b. Should the advertising budget be increased? Complete this question by entering your answers in the tabs below. Req 1A Req 1B How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $8,400 and monthly sales increase by $17,000? (Do not round intermediate calculations.) t operating income Req 1BExplanation / Answer
Income Statement
Present Situation
Working
Sales
$ 342,000.00
(95*3600)
Less: Variable cost
$ 205,200.00
(57*3600)
Contribution margin
$ 136,800.00
Fixed Cost
$ 79,000.00
Net Income
$ 57,800.00
Requirement 1-a
Income Statement
Sales (342000+17000)
$ 359,000.00
Less: Variable cost (60% of Sales)
$ 215,400.00
Contribution margin
$ 143,600.00
Fixed Cost (79000+8400)
$ 87,400.00
Net Income
$ 56,200.00
Decrease in income ($57800-56200)
Answer
Net Operating income Decrease by $ 1600.
Notes
Variable cost will remain 60% of sales and Contribution margin will also be 40% of sales as was before because variable cost changes according to change in sales revenue. The change in variable cost in totality changes in proportion to change in sales revenue.
Requirement 1-b
Advertising budget should not be Increased because it does not increase Operating income of the company rather operating income is decreasing. It is better to carry on business as it is.
Income Statement
Present Situation
Working
Sales
$ 342,000.00
(95*3600)
Less: Variable cost
$ 205,200.00
(57*3600)
Contribution margin
$ 136,800.00
Fixed Cost
$ 79,000.00
Net Income
$ 57,800.00