Question

Need help with 2a and 2b

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: Per Unit s 55 Sales Selling price Variable expenses 100 60 408 Contribution margin22 Fixed expenses are $71,000 per month and the company is selling 4,100 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 co omponents 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 $4 per unit and increase unit sales by 25%.

Answer 1

Net Operating Income = Sales – Variable Expenses – Fixed Expenses

2-a. Additional Units Sold = 4,100*25% = 1,025

Additional Contribution Margin (original) = 1,025*22 = $22,550

Less: Increase in Variable Expenses (for all the units) = (4,100+1,025)*4 = $20,500

Increase in Net operating Income = $2,050

2-b.Since there is an increase in operating income, higher quality components should be used.