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 $75,000 per month and the company is selling 4,000 units per month.
The marketing manager argues that a $9,900 increase in the monthly advertising budget would increase monthly sales by $24,500. 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?
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?
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