Question

Required information Exercise 5-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume (LO5-4] [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 $ 120 78 $ 42 65 35% Fixed expenses are $84,000 per month and the company is selling 2,600 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 20%. 2-b. Should the higher-quality components be used?

Answer 1

Current net operating income = (2600*42) - 84,000 = 25,200

New sales units = 2600 + 20% = 3120

New contribution margin = 120 - (78+5) = 37

New net operating income = (37*3120) - 84,000

= 31,440

Net operating income increases by 6240

Yes