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Question(s) / Instruction(s):

Data for Hermann Corporation are shown below:
                    Per unit          Percent of Sales
Selling price            $72.00      100%     
Variable expenses    $36.72      51%    
Contribution margin    $35.28      49%     
Fixed expenses are $75,800 per month and the company is selling 4,400 units per month.
Requirement 1:
(a)    Calculate the increase or decrease in net operating income if a $9,000 increase in the monthly advertising budget would increase monthly sales by $15,200.
(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 $3 per unit. The marketing manager believes the higher-quality product would increase sales by 20% per month. Should the higher-quality components be used?

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