In: Accounting
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?
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.