Question

Data for Hermann Corporation are shown below: Selling price Variable expenses Contribution margin Per Unit $ 60 39 $ 21 Percent of Sales 100% 65 35% Fixed expenses are $72,000 per month and the company is selling 4,200 units per month. Exercise 2-5 (Algo) Part 2 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 $4 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. Reg 2A Req 2B 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%. Net operating income by Reg 2A Req 2B >

Answer 1

Requirement (2)(a)

Current Contribution Margin

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

= 4,200 units x $21.00 per unit

= $88,200

Revised Contribution Margin

Revised Number of units sold = 5,250 units [4,200 units x 125%]

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

= $21.00 per unit - $4.00 per unit

= $17.00 per unit

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

= 5,250 units x $17.00 per unit

= $89,250

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

= $89,250 - $88,200

= $1,050

“Therefore, the Net Operating Income Increase by $1,050”

Requirement (2)(b)

“YES”. The company should use the higher-quality components. Since the it increases the Net Operating Income by $1,050.