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Data for Hermann Corporation are shown below:
Per Unit Percent of Sales
Selling price $75 100%
Variable expenses $51 68%
Contribution margin $24 32%
Fixed expenses are $75000 per month and the company is selling 4000 units per month.
Question 1.
The marketing manager argues that a $9900 increase in the monthly advertising budget would increase monthly sales by $24500. Calculate the increase or decrease in net operating income.
a. Net operating income increase or decreased by what percentage
b. Should the advertising budget be increased?
Yes
No
Question 2
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 25% per month. Calculate the change in total contribution margin.
a. Total contribution margin increased or decreased by what percentage
b. Should the higher-quality components be used?
Yes
No