Cost Accounting

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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

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