Data for Herron Corporation are shown below:

	Per Unit			Percent of Sales
Selling price	$	70		100%
Variable expenses		49		70%
Contribution margin	$	21		30%

Fixed expenses are $74,000 per month and the company is selling 4,400 units per month.

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Section BreakExercise 3-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume [LO3-4]

2.

value: 12.50 points

Required information

Exercise 3-5 Part 1

Required:
1-a.	The marketing manager believes that an $9,800 increase in the monthly advertising budget would increase monthly sales by $24,000. Calculate the increase or decrease in net operating income.

1-b.

Should the advertising budget be increased?

	No
	Yes

rev: 11_26_2013_QC_41283

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3.

value: 12.50 points

Required information

Exercise 3-5 Part 2

2-a.	Refer to the original data. Management is considering using higher-quality components that would increase the variable cost 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.

2-b.

Should the higher-quality components be used?

	Yes
	No