[The following information applies to the questions displayed below.]

Data for Hermann Corporation are shown below:


Per Unit Percent
of Sales
Selling price $ 80 100%
Variable expenses 52 65%
Contribution margin $ 28 35%


Fixed expenses are $76,000 per month and the company is selling 4,600 units per month.


Required:
1-a.
The marketing manager argues that a $10,000 increase in the monthly advertising budget would increase monthly sales by $25,000. Calculate the increase or decrease in net operating income.



1-b. Should the advertising budget be increased?
Yes
No
2-a.

Refer to the original data. Management is considering using higher-quality components that would increase the variable expense by $5 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.

2-b. Should the higher-quality components be used?
Yes
No