Data for Hermann Corporation are shown below:Per unit Percent of SalesSelling price $90 100%Variable expenses 63 70%Contribution margin $27 30%Fixed expenses are $30,000 per month and the company is selling 2,000 units per month. Requirement 1: (a) Calculate the increase or decrease in net operating income if a $5,000 increase in the monthly advertising budget would increase monthly sales by $9,000. (b) Should the advertising budget be increased as suggested in requirement 1 (a) above? Requirement 2:Refer to the original data. Management is considering using higher-quality components that would increase the variable cost by $2 per unit. The marketing manager believes the higher-quality product would increase sales by 10% per month. Should the higher-quality components be used?
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