Data for Hermann Corporation are shown below Per Unit Percent of Sales Selling price $ 80...

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. 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 $4 per unit and increase unit sales by 20%.

2-b. Should the higher-quality components be used?

Solutions

Expert Solution

Original Data:

Selling Price (100%) = $80

Variable Expense (55%) = $44

Contribution Margin (45%) = 36

Fixed Expense = $76000 per month

Number of unit sold per month = 2500

Particulars	Amount($)
Sale(2500*80)	200000
Less: Variable Expense (200000*55%)	110000
Contribution (45%)	90000
Less: Fixed Expense	76000
Operating income	14000

Percentage of operating income on sale = 14000/200000 = 7%

2-a. Computation of operating income If Variable expense increase by $4 and sales by 20%:

Number of units sold after 20% increase in sales = 2500 + 2500*20% = 2500 + 500 = 3000 units

Variable cost for 3000 units = (44+4)*3000 = 144000

Particulars	Amount($)
Sale	240000
Less: Variable Expense	144000
Contribution (40%)	96000
Less: Fixed Expense	76000
Operating income	20000

Percentage of operating income on sale = 20000/240000 = 8.33%

Net increase in operating income = 20000 -14000 = 6000

Net increase in operating income in percentage by 1.33% (8.33%-7%).

2-b. Yes, Hermann Corporation should use higher quality components because there is increase in net operating income by $6000.

ekkarill92 answered 1 year ago

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