Question

Chapter 5 Exercises i Saved Required information (The following information applies to the questions displayed below.] Part 2 of 2 Data for Hermann Corporation are shown below: 10 points Per Unit $100 61 Percent of Sales 100% Selling price Variable expenses Contribution margin eBook $ 39 39% Hint Fixed expenses are $80,000 per month and the company is selling 3,700 units per month. Print References 2-a. 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 $3 per unit and increase unit sales by 15%. 2-b. Should the higher-quality components be used? Complete this question by entering your answers in the tabs below. Req 2A Req 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 $3 per unit and increase unit sales by 15%. Show less Net operating income Reg 2A Req 2B>

Answer 1

2A.

Income Statement ( Present)
Sales ( 3,700 x 100)	370,000
Variable cost ( 3,700 x 61)	-225,700
Contribution margin	$144,300
Fixed cost	-80,000
Net Operating Income	$64,300

Proposed Changes:

Increase in variable cost = $3 per unit

Variable cost per unit = 61+3

= $64

Increase in unit sales = 15%

= 3,700 x 15%

= 555

Sales quantity = 3,700+555

= 4,255

Income Statement ( Proposed )
Sales ( 4,255 x 100)	425,500
Variable cost (4,255 x 64)	-272,320
Contribution margin	$153,180
Fixed cost	-80,000
Net Operating Income	$73,180

Net operating income increase by $8,880 (73,180-64,300)

2b.

Higher quality components should be used since it will increase net operating income.

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