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.
|
| Requirement 1: |
|
(a)
|
Calculate the increase or decrease in net operating income if a $5,000 increase in the monthly advertising budget would increase monthly sales by $9,000.
|
net operating income: ?
| (b) |
Should the advertising budget be increased as suggested in requirement 1(a) above? |
| Requirement 2: |
|
Refer to the original data. Management is considering using higher-quality components that would increase the variable cost by $2 per unit. The marketing manager believes the higher-quality product would increase sales by 10% per month. Should the higher-quality components be used?
|