Reference no: EM131648004

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?