Question

# Data for Hermann Corporation are shown below: Per Unit Percent of Sales Selling price \$ 130...

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.

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%

Calculation of net operating income under current plan :

 Sales [ 2,800 units * \$130 ] \$364,000 (-) Variable cost [ 2,800 units * \$78 ] ( \$218,400 ) Contribution margin \$145,600 (-) Fixed expenses ( \$86,000 ) Net operating income \$59,600

Calculation of net operating income if the company uses higher-quality components :

Here, the variable cost per unit will increase by \$6 and Sales units will increase by 15%

So, variable cost per unit = \$78 + \$6 = \$84

Total sales units = 2,800 + [ 2,800 * 15% ] = 3,220 units

 Sales [ 3,220 units * \$130 ] \$418,600 (-) Variable cost [ 3,220 units * \$84 ] ( \$270,480 ) Contribution margin \$148,120 (-) Fixed expenses ( \$86,000 ) Net operating income \$62,120

If the company uses higher-quality components, its net operating income will increase by \$2,520 per month [ i.e. \$62,120 - 59,600 ]

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