Question

Required information [The following information applies to the questions displayed below.] Data for Hermann Corporation are shown below: Per Unit Percent of Sales Selling price $ 80 100 % Variable expenses 52 65 Contribution margin $ 28 35 % Fixed expenses are $76,000 per month and the company is selling 4,600 units per month. Garrison 16e Rechecks 2017-05-02 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 $5 per unit and increase unit sales by 25%. 2-b. Should the higher-quality components be used?

Answer 1

Ans- First calculate the original net income:

Sales ($80*4,600)	$368,000
Less: Variable expenses ($52* 4,600)	$239,200
Contribution margin	$128,800
Less: Fixed expenses	$76,000
Net income	$52,800

The units will increase by 1,150 (4,600*25%) and the variable cost will increase from $52 to $ 57 a unit.

Net income:-

Sales ($80*5,750)	$460,000
Less: variable expenses ($57*5,750)	$327,750
Contribution Margin	$132,250
Less: Fixed expenses	$76,000
Net Income	$56,250

Conclusion:- The company should incorporate the new component since its implementation leads to a $3,450 ($56,250-$52,800) increase in net income .

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