Data for hermann corporation are shown below:

per unit percent of sales
selling price $90 100%
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 sites by $9,000.
should the advertising budget be increased?
(2) refer to the original data. how much will net operating income increase per month if the company uses higher-quality components that increase the variable expense by $2 per unit and increase unit sales by 10%?

1. Yes, the advertising budget should be increased.

2. Calculation to determine the  net operating income

First step is to Current net operating income

Using this formula

Current net operating income= Total Contribution margin - Fixed cost

Let plug in the formula

Current net operating income= (2,000×$27) - $30,000

Current net operating income=$54,000-$30,000

Current net operating income=$24,000

Second step is to determine the Projected net operating income

Projected net operating income= [2,000+10%×($27-$2)] -$30,000

Projected net operating income=($200×$25)-$30,000

Projected net operating income=$5,000-$30,000

Projected net operating income=$25,000

Now let determine the Net operating income increases

Net operating income increases =$25,000- $24,000

Net operating income increases =$1,000

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1) Yes monthly advertising budget should be increased as it increases the sales by $ 9000 even then there would be profit of $ 4000

2) the net operating income will increase by (38,000-24,000) = $ 14,000

Explanation:

Given

Sales        2000 units for $ 90 =  $ 180,000

Variable Expenses                   =   $126,000

Contribution Margin                   = $ 54,000

Less Fixed Expenses                  = $ 30,000

Operating Income                      = $ 24,000

1) Yes monthly advertising budget should be increased as it increases the sales by $ 9000 even then there would be profit of $ 4000

2) the net operating income will increase by (38,000-24,000) = $ 14,000

Sales        2000 units for $ 99 =  $ 198,000

Variable Expenses (63 +2= $65) =   $130,000

Contribution Margin                   = $ 68,000

Less Fixed Expenses                  = $ 30,000

Operating income                   = $ 38,000

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