Question

1) Data for Hermann Corporation are shown below:

	Per Unit				Percent of Sales
Selling price	$	110				100	%
Variable expenses		77				70
Contribution margin	$	33				30	%

Fixed expenses are $82,000 per month and the company is selling 3,500 units per month.

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 $5 per unit and increase unit sales by 20%.

Answer 1

Solution :

The Operating Income will increase by $ 2,100.

Working :

Step 1 : Current Income

Current Income = (Units Sold * Contribution per Unit) - fixed Cost

Current Income = (3,500 * $ 33) - $ 82,000

= $ 115,500 - $ 82,000

= $ 33,500

Step 2 : Revised Units of Sales and Contribution per Unit

Increase in Unit by 20%

Revised Units = 3,500 * 1.20

= 4,200 Units

Revised Contrbution = Sales Price per Units - Revised Variable Cost per Unit

= $ 110 - ($ 77 + $ 5)

= $ 28

Step 3 : Revised Income

Revised Income = (Units Sold * Contribution per Unit) - fixed Cost

Revised Income = (4,200 * $ 28) - $ 82,000

= $ 117,600 - $ 82,000

= $ 35,600

Step 4 : Increase (Decrease) In Income :

Increase in Income = Revised Income - Currnt Income

= $ 35,600 - $ 33,500

= $ 2,100  

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