Question

Data for Hermann Corporation are shown below: Per Unit $ 130 Selling price Variable expenses Contribution margin Percent of Sales 100% 60 404 Fixed expenses are $86,000 per month and the company is selling 2,800 units per month 2-a. Refer to the original dato. How much will net operating income increase (decrease) per month if the company uses higher quality components that increase the variable expense by $6 per unit and increase unit sales by 15%. 2-b. Should the higher-quality components be used? Complete this question by entering tabs Req 2A Reg 2B Refer to the original data. How much will net operating income increase (decrease) per month if the company uses higher quality components that increase the variable expense by $6 per unit and increase unit sales by 15%. Net operating income Reg 28 >

Answer 1

Solution 2-a:

Existing Net operating income = Contribution margin - Fixed costs = 2800*$52 - $86000 = $59,600

Increased unit sales = 2800 *115% = 3220 units

New contribution margin per unit = $130 - ($78+$6) = $46 per unit

Net Total Contribution margin = 3220 * $46 = $148,120

New Net operating income = $148120 - $86000 = $62,120

Net operating income increase by = $62120 - $59600 = $2,520

Solution 2b:

Yes, Higher quality component should be used.