Data for Hermann Corporation are shown below:
Per Unit | Percent of Sales | ||||||
Selling price | $ | 70 | 100 | % | |||
Variable expenses | 49 | 70 | |||||
Contribution margin | $ | 21 | 30 | % | |||
Fixed expenses are $74,000 per month and the company is selling 4,400 units per month.
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 $4 per unit and increase unit sales by 25%.
2-b. Should the higher-quality components be used?
Current | Proposed | |
Unit Sales | 4400 | (4400*1.25)=5500 |
Sales | (4400*70)=308,000 | (5500*70)=385,000 |
Variable expenses | (4400*49)=215600 | 5500*(49+4)=291500 |
Contribution margin | 92400 | 93500 |
Fixed expenses | 74,000 | 74,000 |
Net operating income | 18400 | 19500 |
Increase in Net operating income=(19500-18400)=$1100
Hence higher quality component should be used.
Data for Hermann Corporation are shown below: Per Unit Percent of Sales Selling price $ 70...
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Data for Hermann Corporation are shown below: Selling price Variable expenses Contribution margin Per Unit $ 80 52 Percent of Sales 100% 65 35% $ 28 Fixed expenses are $76,000 per month and the company is selling 4.600 units per month. 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 $5 per unit and increase unit sales by 25%. 2-b....
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