Exercise 5-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume [LO4]

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

Data for Herron Corporation are shown below:

	Per Unit			Percent of Sales
Selling price	$	50		100%
Variable expenses		30		60%
Contribution margin	$	20		40%

Fixed expenses are $74,300 per month and the company is selling 3,500 units per month. (Input the amount as a positive value. Do not round intermediate calculations. Round your answer to 2 decimal places.)

Exercise 5-5 Part 1

Required:
1a.	The marketing manager believes that an $7,600 increase in the monthly advertising budget would increase monthly sales by $16,900. Calculate the increase or decrease in net operating income.

Net operating income

by

$

1b.

Should the advertising budget be increased ?

No

Yes

Exercise 5-5 Part 2

2a.	Management is considering using higher-quality components that would increase the variable cost by $6 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 by

$

2b.

Should the higher-quality components be used?

	Yes
	No