Problem - Data for Hermann Corporation are shown below:
Per Unit Percent of Sales
Selling price $65 100%
Variable expenses 39 60%
Contribution margin $26 40%
Fixed expenses are $73,000 per month and the company is selling 4,300 units per month.
1 - The marketing manager argues that a $9,700 increase in the monthly advertising budget would increase monthly sales by $23,500. Calculate the increase or decrease in net operating income.
2. Refer to the original data. Management is considering using higher-quality components that would increase the variable expense by $5 per unit. The marketing manager believes that the higher-quality product would increase sales by 25% per month. Calculate the change in total contribution margin.
Total Contribution Margin increases or decreases by _________________. Should the higher-quality components be used?