Question

[The following information applies to the questions displayed below.] Data for Hermann Corporation are shown below: Percent of Sales 100% 61% Per Unit $ 100 61 Selling price Variable expenses ol Contribution margin $ 39 39% Fixed expenses are $80,000 per month and the company is selling 3,700 units per month. value: 10.00 points Required: 1-a. The marketing manager argues that a $8,500 increase in the monthly advertising budget would increase monthly sales by $17,500. 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 value: 10.00 points 2-a. Refer to the original data. Management is considering using higher-quality components that would increase the variable expense by $3 per unit. The marketing manager believes that the higher- quality product would increase sales by 15% per month. Calculate the change in total contribution margin. Total contribution margin

Answer 1

1a
Increase in monthly sales	17500
X Contribution margin ratio	39%
Increase in Contribution margin	6825
Less: Advertising costs	8500
Net Operating income decreases by	1675
1b
No, advertising budget should not be increased
2a
Current Contribution margin	144300	=3700*39
Revised sales	425500	=3700*1.15*100
Less: Revised variable costs	272320	=3700*1.15*(61+3)
Revised Contribution margin	153180
Total Contribution margin increases by	8880	=153180-144300