Question

Required information Exercise 6-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume (L06-4) [The following information applies to the questions displayed below.) Data for Hermann Corporation are shown below: Selling price Variable expenses Contribution margin Per Unit $ 90 63 $ 27 Percent of Sales 1009 70 304 Fixed expenses are $78,000 per month and the company is selling 3,500 units per month Exercise 6-5 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 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 $4 per unit and increase unit sales by 20%. Net operating income

Answer 1

6-5

2a

Existing Net operating income = Contribution margin - Fixed costs

= (3500* $27) - $78000 = $16500

Increase in unit sales = 3500 * 120% = 4200 units

Increase in Variable cost = $63 + $4 = $67

Contribution Per unit = $90 - $67 = $23

Net Total Contribution margin = 4200 units * $23 = $96600

New Net operating income = $96600 - $78000 = $18600

Increase in Net operating income =$18600 - $16500 =$ 2100

2b : Yes, Higher quality component should be used because the operating Income increases.

6-6

Seling price	$11
Variable expense	$8
Contribution per unit	$3
Fixed Cost	$3000

1.Breakeven Point in unit sales= Fixed Cost/ Contribution per unit = $3000/$3 = 1000 baskets

2.Breakeven Point in dollar sales = 1000 units * $11 = $11000

3.New Fixed expenses = $3000 + $600 = $3600

  Breakeven Point in unit sales = $3600/$3 = 1200 baskets

Breakeven Point in dollar sales = 1200 units *$11 = $13200

6-2

2. Selling price = $28 per unit

Variable expense = $22 per unit

Contribution per unit = $6

Fixed Expense = $ 24000

  Breakeven Point in unit sales= Fixed Cost/ Contribution per unit

=$24000/$6 = 4000 units

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