Question: 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

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.

1(a). Calculate the increase or decrease in net operating income if a $5,000 increase in the monthly advertising budget would increase monthly sales by $9,000. net operating income: ?

(b). Should the advertising budget be increased as suggested in requirement 1(a) above?

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?

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