Exercise 5-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume [LO5-4]

[The following information applies to the questions displayed below.]

Data for Hermann Corporation are shown below:

	Per Unit			Percent of Sales
Selling price	$	80		100%
Variable expenses		44		55%
Contribution margin	$	36		45%

Fixed expenses are $76,000 per month and the company is selling 2,500 units per month.

Exercise 5-5 Part 1

Required:

1-a.

The marketing manager argues that a $8,100 increase in the monthly advertising budget would increase monthly sales by $15,500. Calculate the increase or decrease in net operating income.

Net operating income

decreases

by

Exercise 5-5 Part 2

2-a.	Refer to the original data. Management is considering using higher-quality components that would increase the variable expense by $4 per unit. The marketing manager believes that the higher-quality product would increase sales by 20% per month. Calculate the change in total contribution margin.

Total contribution margin

increases

by