Question

Required information

Exercise 5-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume [LO5-4]

[The following information applies to the questions displayed below.]

Data for Hermann Corporation are shown below:

	Per Unit			Percent of Sales
Selling price	$	90		100	%
Variable expenses		63		70
Contribution margin	$	27		30	%

Fixed expenses are $30,000 per month and the company is selling 2,000 units per month.

Exercise 5-5 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 $2 per unit and increase unit sales by 10%.

2-b. Should the higher-quality components be used?

Answer 1

Calculation of net operating income increase(decrease)
	Current	propose
sales (2000*90),(2000*1.10*90)	180000	198000
less: variable expenses(2000*63),(2000*1.10*65)	126000	143000
contribution margin	54000	55000
less: fixed expenses	30000	30000
Net operating income	24000	25000
Net income increase by (25000-24000) = 1000
2-b) Higher quality component should be used

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