Question

20.20 UNLINE Exercise 3-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume [LO3-41 The following information applies to the questions displayed below. Data for Hermann Corporation are shown below: Percent Per of Unit Sales Selling price $140 100% Variable 91 65% expenses Contributions 49 35% margin Fixed expenses are $85,000 per month and the company is selling 3,000 units per month References Section Break Exercise 3-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume [LO3-4) 3 value: 1.81 points Exercise 3-5 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. Net operating income 1-b. Should the advertising budget be increased? Yes No Hints References eBook & Resources Hint #1 Check my work 4 value: 1.81 points Exercise 3-5 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. Total contribution margin 2-b. Should the higher-quality components be used? Yes "No

Answer 1

1a
Increase in sales	21500
X Contribution margin ratio	35%
Increase in Contribution margin	7525
Less: Advertising expense	9300
Net Operating income decreases by	1775	or (1775)
1b
No, the advertising budget should not be increased
2a
Unit sales	3600	=3000*1.2
Current Contribution margin	147000	=3000*49
Revised Contribution margin	154800	=3600*(140-97)
Total Contribution margin increases by	7800	=154800-147000
2b
Yes, higher quality components be used