Required information

Exercise 6-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume [LO6-4]

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

Data for Hermann Corporation are shown below:

	Per Unit				Percent of Sales
Selling price	$	100				100	%
Variable expenses		61				61
Contribution margin	$	39				39	%

Fixed expenses are $80,000 per month and the company is selling 3,700 units per month.

Exercise 6-5 Part 1

Required:

1-a. How much will net operating income increase (decrease) per month if the monthly advertising budget increases by $8,500 and monthly sales increase by $17,500?

Net operating income

by

1-b. Should the advertising budget be increased?

Yes or No?

Exercise 6-5 Part 2

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 $3 per unit and increase unit sales by 15%.

Net operating income

by

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

Yes or no