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 Requirement 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 Requirement 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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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.

Requirement 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?

Requirement 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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