Data for Hermann Corporation are shown below:
|Per Unit||Percent of Sales|
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?
|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|
|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.
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