Question

Data for Hermann Corporation are shown below:

	Per Unit				Percent of Sales
Selling price	$	100				100	%
Variable expenses		61				61
Contribution margin	$	39				39	%

Fixed expenses are $80,000 per month and the company is selling 3,700 units per month.

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 $3 per unit and increase unit sales by 15%.

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

Answer 1

Answer:-

1)-The net operating income will increase per month by $8880 (ie $73180-$64300).

2)-The higher quality components should be used due to increase in net operating income of $8880. Explanation:- Hermann Corporation Operating income Current Scenerio Particulars Amount $ Sales 3700 unit*$100 per unit 370000 Less:- Variable cost 3700 unit*$61 per unit 225700 Contribution 144300 Less:- Fixed costs 80000 Net operating income 64300 Hermann Corporation Operating income Proposed Scenerio Particulars Amount $ Sales (3700 units*1.15)*$100 per unit 425500 Less:- Variable cost ($61 per unit+$3 per unit)*4255 units 272320 Contribution 153180 Less:- Fixed costs 80000 Net operating income 73180