Exercise 5-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume [
ID: 2503118 • Letter: E
Question
Exercise 5-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume [LO4]
[The following information applies to the questions displayed below.]
Exercise 5-5 Part 1
1a.
The marketing manager believes that an $8,100 increase in the monthly advertising budget would increase monthly sales by $17,000. Calculate the increase or decrease in net operating income.
Exercise 5-5 Part 2
2a.
Management is considering using higher-quality components that would increase the variable cost by $5 per unit. The marketing manager believes that the higher-quality product would increase sales by 15% per month. Calculate the change in total contribution margin.
[The following information applies to the questions displayed below.]
Data for Herron Corporation are shown below:Explanation / Answer
CURRENT OPERATING INCOME:-
CONTRIBUTION [15*4500] = 67500
LESS:-FIXED COST = (74600)
OPERTAING INCOME = (7100) ***[NEGATIVE]
1A]NEW CONTRIBUTION [ 67500+17000*30%] = 72600
LESS:-NEW FIXED COST [74600+8100] = (82700)
OPERATING INCOME = (10100) ***[NEGATIVE]
NET OPERATING INCOME WOULDDECREASE BY $3000 [10100-7100]
1B]NO THE ADVERTISING BUDGET SHOULD NOT BE INCREASED.
2A]SALES [(4500*1.15)*50] = 258750
LESS:VARIBLE COST [(4500*1.15)* (35+5) ] = (207000)
CONTRIBUTION = 51750
LESS:- FIXED COST = (74600)
OPERATING INCOME = (22850)***[NEGATIVE]
TOTAL CONTRIBUTION MARGIN DECREASES BY $15750 [67500-51750]
2B]NO , THE HIGHER QUALITY COMPONENTS SHOULD NOT BE USED.