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	$	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.

Required:

1-a. How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $5,000 and monthly sales increase by $9,000?

1-b. Should the advertising budget be increased?

2-a. Refer to the original data. How much will net operating income increase (decrease) per month if the company uses higher-quality components that increase the variable expense by $2 per unit and increase unit sales by 10%.

2-b. Should the higher-quality components be used?