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.


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