Data for Hermann Corporation are shown below:

 
                                     Per Unit     Percent of Sales
  Selling price                   $75           100%
  Variable expenses         $51             68%
    
  Contribution margin       $24             32%
    
  
Fixed expenses are $75,000 per month and the company is selling 4,000 units per month.
 
Question 1.


The marketing manager argues that a $9,900 increase in the monthly advertising budget would increase monthly sales by $24,500. Calculate the increase or decrease in net operating income.
      
a. Net operating income increase or decreased by what percentage 
 
b. Should the advertising budget be increased? 
    Yes
    No

 
Question 2
Refer to the original data. Management is considering using higher-quality components that would increase the variable expense by $4 per unit. The marketing manager believes that the higher-quality product would increase sales by 25% per month. Calculate the change in total contribution margin.
      
 a. Total contribution margin increased or decreased by what percentage
 
 b. Should the higher-quality components be used?  
    Yes
    No

Answers

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