Question

Data for Hermann Corporation are shown below:

	Per Unit				Percent of Sales
Selling price	$	80				100	%
Variable expenses		44				55
Contribution margin	$	36				45	%

Fixed expenses are $76,000 per month and the company is selling 2,500 units per month.

rev: 06_04_2020_QC_CS-205709, 06_18_2020_QC_CS-216765, 07_14_2020_QC_CS-216765

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?

Answer 1

Particulars	Original Data	Higher Quality Components
Selling Price (Per Unit)	$80	$80
Variable Cost (Per Unit)	($44)	($48) ($44+$4)
Contribution Margin (Per Unit)	$36	$32
No. of units	$2,500	$3,000 (120% of $2,500)
Contribution Margin (Total)	$90,000	$96,000
Fixed Cost	($76,000)	($76,000)
Net Operating Income	$14,000	$20,000

a. Net Operating Profit will increase by $6,000

b. Higher quality components should be used as it increases the profit.