Question

Required information [The following information applies to the questions displayed below.] Data for Hermann Corporation are shown below: Selling price Variable expenses Contribution margin Per Unit $ 140 91 Percent of Sales 100% 65 35% $ 49 Fixed expenses are $88,000 per month and the company is selling 3,000 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 $6 per unit and increase unit sales by 20%. 2-b. Should the higher-quality components be used? Complete this question by entering your answers in the tabs below. Reg 2A Reg 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 $6 per unit and increase unit sales by 20%. Net operating income < Req 2A Req 2B >

Answer 1

Solution

Net operating income

Increase

by

$          7,800

Yes

The high quality component should be used because it increases overll net income.

Working

	Current situation (3000 units)	After high component is used (3600 units)	Increase in income
Sales revenue	$        420,000	$        504,000
Variable expenses	$        273,000	$        349,200
Contribution margin	$        147,000	$        154,800
Fixed cost	$          88,000	$          88,000
Operating income	$          59,000	$          66,800	$          7,800

Variable cost per unit after new component will be $97 per unit