BRIEF EXERCISE 6–5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume [ LO4 ]

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.

Required:

1. The marketing manager argues that a $5,000 increase in the monthly advertising budget would increase monthly sales by $9,000. Should the advertising budget be increased?

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?