Ch 5: E 5,6,7

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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	$	140		100%
Variable expenses		91		65%
Contribution margin	$	49		35%

Fixed expenses are $88,000 per month and the company is selling 3,000 units per month.

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Section BreakExercise 5-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume [LO5-4]

1.

value: 2.00 points

Required information

Exercise 5-5 Part 1

Required:
1-a.	The marketing manager argues that a $9,300 increase in the monthly advertising budget would increase monthly sales by $21,500. Calculate the increase or decrease in net operating income.

1-b.

Should the advertising budget be increased?

	Yes
	No

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Hint #1

2.

value: 2.00 points

Required information

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 $6 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