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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                       38.88                      54     

  Contribution margin                   $33.12                      46%     

Fixed expenses are $74,500 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 $7,600 increase in the monthly advertising budget would increase monthly sales by $14,300.

(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 18% per month. Should the higher-quality components be used?

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