Data for Hermann Corporation are shown below:

Per Unit

Percent

of Sales

Selling price

$

110

100%

Variable expenses

77

70%

Contribution margin

$

33

30%

Fixed expenses are $82,000 per month and the company is selling 3,500 units per month.

1-a. The marketing manager argues that a $8,700 increase in the monthly advertising budget would increase monthly sales by $18,500. Calculate the increase or decrease in net operating income.

Net operating income _____? By ____?

1-b. Should the advertising budget be increased? Yes or No?

2-a. Refer to the original data. Management is considering using higher-quality components that would increase the variable expense by $5 per unit. The marketing manager believes that the higher-quality product would increase sales by 20% per month. Calculate the change intotal contribution margin.

Total contribution margin ______? By______?

Should the higher-quality components be used? Yes or No?