Data for Hermann Corporation are shown below: Fixed expenses are $76,000 per month and the company is selling 2.500 units per month. Required: a. The marketing manager argues that a $8, 100 increase in the monthly advertising budget would increase monthly sales by $15, 500. Calculate the increase or decrease in net operating income. b. 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 20% per month. Calculate the change in total contribution margin.
a.Increase in contribution=($15500*45%)=$6975
Less:increase in Fixed expenses=$8100
Hence net operating income would decrease by=$1125.
Current contribution margin=(36*2500)=$90000
Contribution margin/iunit would be=($80-($44+4))=$32.
Hence total contribution margin would be=(32*(2500*120%)=$96000.
Hence Total contribution margin would increase by=($96000-$90000)=$6000.