Question

Required information [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 $ 115 69 $ 46 60 40% Fixed expenses are $83,000 per month and the company is selling 2.500 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 15%. 2-b. Should the higher-quality components be used? Complete this question by entering your answers in the tabs below.

Answer 1

2A) Current Proposed 2,500 2,875 [Proposed = 2500 x 115%] Number of units sold Selling price per unit Less: Variable expense per unit Contribution margin per unit $115 $69 $46 $115 [No change] $74 [Proposed = $69 + $5] $41 Contribution margin, dollars $115,000 $117,875 (Current = 2500 x $46; Proposed = 2875 x $41] As the fixed expenses do not change, net operating income will increase by $2,875 (Increase in net operating income = Diff. in contribution margin = $117875 - $115000 = $2875) 2B) Yes, the higher-quality components should be used because it increases net operating income.