Changes in Variable Costs, Fixed Costs, Selling Price, and Volume.
Changes in Variable Costs, Fixed Costs, Selling Price, and Volume
Data for Hermann Corporation are shown below:
|
Per Unit
|
percent of Sales
|
|
Selling price
|
$90
|
100%
|
|
Less 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.
Required:
1. The marketing manager argues that a $5,000 increase in the monthly advertising budget would increase monthly sales by $9,000. Should the advertising budget be increased?
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?