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 $78,000 per month and the company is selling 3,500 units per month.

Required:

1-a.

1-b.

Should the advertising budget be increased?

Yes

No Part 2. 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.

2-b.

Should the higher-quality components be used?

	Yes
	No

The marketing manager argues that a $8,300 increase in the monthly advertising budget would increase monthly sales by $16,500. Calculate the increase or decrease in net operating income.