Cost Accounting

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.

Question 1.

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? 

    Yes

    No

Question 2

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?  

    Yes

    No