Question

Saved Help Save & Exit 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: Per Unit $75 Percent of Sales 100% Selling price Variable expenses Contribution margin 51 $24 32% Fixed expenses are $75,000 per month and the company is selling 4,000 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 $4 per unit and increase unit sales by 25%. 2-b. Should the higher-quality components be used?

Answer 1

Requirement 1

Increase in net income = $ 4000

Requirement 2

Yes

The higher quality product should be used.

Working

Income earned before accepting new material
	Per Unit	Total	% of sales
Sales revenue	$          75.00	$    300,000.00	100%
Variable cost	$          51.00	$    204,000.00	68%
Contribution margin	$          24.00	$      96,000.00	32%
Fixed cost		$      75,000.00
Net income		$      21,000.00

.

Income earned after accepting new material
	Per Unit	Total	% of sales
Sales revenue	$          75.00	$    375,000.00	100%
Variable cost	$          55.00	$    275,000.00	73%
Contribution margin	$          20.00	$    100,000.00	27%
Fixed cost		$      75,000.00
Net income		$      25,000.00

.

Income earned before accepting new material	$ 21,000.00
Income earned after accepting new material	$ 25,000.00
Net Increase in income	$ 4,000.00

Question 2

Requirement 1

Decrease in income = $2060

Requirement 2

No

the budget should not be accepted

Working

Income earned before accepting advertising budget
	Per Unit	Total	% of sales
Sales revenue	$          75.00	$    300,000.00	100%
Variable cost	$          51.00	$    204,000.00	68%
Contribution margin	$          24.00	$      96,000.00	32%
Fixed cost		$      75,000.00
Net income		$      21,000.00

.

Income earned after accepting advertising budget
	Per Unit	Total	% of sales
Sales revenue	$          75.00	$    324,500.00	100%
Variable cost	$          55.00	$    220,660.00	68%
Contribution margin	$          20.00	$    103,840.00	32%
Fixed cost		$      84,900.00
Net income		$      18,940.00

.

Income earned before accepting advertising budget	$ 21,000.00
Income earned after accepting advertising budget	$ 18,940.00
Net Decrease in income	$    2,060.00