Question

EXERCISE 5-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume L05-4 Data for Hermann Corporation are shown below: Per Unit Percent of Sales $90 63 100% 70 Selling price Variable expenses Contribution margin $27 30% Fixed expenses are $30,000 per month and the company is selling 2,000 units per month.

Answer 1

Requirement 1

Decrease in income

$          (2,300)

.

.Working

	Current situation	If Fixed cost increase	Change in income
Revenue	$        180,000	$        189,000
Variable costs	$        126,000	$        132,300
Contribution Margin	$          54,000	$          56,700
Fixed costs	$          30,000	$          35,000
Net income	$          24,000	$          21,700	$       (2,300)

.

Net income before	$          24,000
Net income after increase in advertisement expense	$          21,700
Decrease in income	$          (2,300)

Requirement 2

Increase in income

$            1,000

.

Working

	Current situation	Use of high quality material	Change in income
Revenue	$        180,000	$        198,000
Variable costs	$        126,000	$        143,000
Contribution Margin	$          54,000	$          55,000
Fixed costs	$          30,000	$          30,000
Net income	$          24,000	$          25,000	$         1,000

.

Net income before	$          24,000
Net income after increase in advertisement expense	$          25,000
Increase in income	$            1,000