Question

Required information Exercise 5-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume (L05-4) (The following information applies to the questions displayed below.) Data for Hermann Corporation are shown below: Percent of Sales 100% Selling price Variable expenses Contribution margin Per Unit $ 80 52 $ 28 65 35% Fixed expenses are $76,000 per month and the company is selling 4,600 units per month. Exercise 5-5 Part 2 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. 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 $5 per unit and increase unit sales by 25%. Net operating income by Req2A Req 2B >

Answer 1

Current net operating income = (28*4,600)-76,000 = 52,800

Revised sales units = 4600 + 25% = 5750

Revised variable cost = 52 + 5 = 57

Revised contribution margin = 80 - 57 = 23

Revised net operating income = (23*5750)-76,000 = 56,250

Increase in net operating income = 56,250 - 52,800 = 3450

Net operating income increases by $3450

Yes

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