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

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net operating income: ?

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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)=$21,700​Part 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

### 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)=$25,000​Part 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.
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