Question
In: Accounting
How much will net operating income increase (decrease) per month if the company uses higher-quality components that increase the variable expense by $4 per unit and increase unit sales by 20%
Data for Hermann Corporation are shown below:
| Per Unit | Percent of Sales | ||||||
| Selling price | $ | 80 | 100 | % | |||
| Variable expenses | 44 | 55 | |||||
| Contribution margin | $ | 36 | 45 | % | |||
Fixed expenses are $76,000 per month and the company is selling 2,500 units per month.
2-a. How much will net operating income increase (decrease) per month if the company uses higher-quality components that increase the variable expense by $4 per unit and increase unit sales by 20%.
2-b. Should the higher-quality components be used?
Solutions
Expert Solution
| Current | Proposed | |
| Units sold | 2500 | (2500*1.2)=3000 |
| Sales | (2500*80)=200,000 | (3000*80)=240,000 |
| Variable expenses | (2500*44)=110,000 | (3000*(44+4))=$144,000 |
| Contribution margin | $90,000 | $96,000 |
| Fixed expenses | $76000 | $76000 |
| Net operating income | $14000 | $20,000 |
a.Increase in Net operating income=(20,000-14000)=$6000
b.Hence higher-quality components should be used.
ekkarill92 answered 1 year agoRelated Solutions
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