Question

Required information [The following information applies to the questions displayed below.] Data for Hermann Corporation are shown below: Per Unit Percent of Sales Selling price $ 130 100 % Variable expenses 78 60 Contribution margin $ 52 40 % Fixed expenses are $86,000 per month and the company is selling 2,800 units per month. Garrison 16e Rechecks 2017-05-02 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 15%. 2-b. Should the higher-quality components be used?

Answer 1

Sales Less: Variable cost Contribution margin Less: Fixed expenses Net Income Current sales 364000 218400 145600 86000 59600 Increased Sales 418600 270480 1481201 86000 62120 Requirement: 2a Net Operating income Increase 2520 Net Operating income = Increased sales Net income - Current sales Net Income Requirement: 2b Should the higher quality components be used Yes