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

Data for Hermann Corporation are shown below:

	Per Unit			Percent of Sales
Selling price	$	70		100%
Variable expenses		49		70%
Contribution margin	$	21		30%

Fixed expenses are $74,000 per month and the company is selling 4,400 units per month.

3.

value: 10.00 points

Required information

Required:
1-a.	The marketing manager argues that a $9,800 increase in the monthly advertising budget would increase monthly sales by $24,000. Calculate the increase or decrease in net operating income.

1-b.

Should the advertising budget be increased?

	Yes
	No

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WorksheetDifficulty: 1 EasyLearning Objective: 05-04 Show the effects on net operating income of changes in variable costs, fixed costs, selling price, and volume.

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4.

value: 10.00 points

Required information

2-a.	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.

2-b.

Should the higher-quality components be used?

	Yes
	No