Question

Required Information (The following information applies to the questions displayed below.] Data for Hermann Corporation are shown below: Percent of Sales 100 Per Unit Selling price Variable expenses $115 69 60 Contribution margin $ 46 Fixed expenses are $83,000 per month and the company is selling 2,500 units per month. 2-a. How much will net operating income increase (decrease) per month if the company uses higher-quality components that Increase the variable expense by $5 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. Reg 2A Reg 28 How much will net operating income increase (decrease) per month if the company uses higher-quality components that increase the variable expense by $5 per unit and increase unit sales by 15%. by Net operating income Reg 28 >

Answer 1

Requirement (2)(a)

Current Contribution Margin

Current Contribution Margin = Number of units sold x Contribution margin per unit

= 2,500 units x $46 per unit

= $115,000

Revised Contribution Margin

Revised Number of units sold = 2,875 units (2,500 units x 115%)

Revised Contribution margin per unit = Current contribution margin per unit – Increase in variable cost per unit

= $46 per unit - $5 per unit

= $41 per unit

Revised Contribution Margin = Number of units sold x Contribution margin per unit

= 2,875 units x $41 per unit

= $117,875

Increase in Net Operating Income = Revised Contribution Margin - Current Contribution Margin

= $117,875 - $115,000

= $2,875

“Therefore, the Net Operating Income Increase by $2,875”

Requirement (2)(b)

“YES”. The company should use the higher-quality components. Since the it increases the Net Operating Income by $2,875.