Required information Exercise 6-5 Changes in Variable Costs, Fixed Costs, Sellin

Question

Required information Exercise 6-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume [L06-4 The following information applies to the questions displayed below. Data for Hermann Corporation are shown below Percent of Sales 1008 Selling price Variable expenses Contribution margin Per Unit $ 95 57 $ 38 60 408 Fixed expenses are $79,000 per month and the company is selling 3,600 units per month. Exercise 6-5 Part 2 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 $3 per unit and increase unit sales by 10%. 2-b. Should the higher-quality components be used? Complete this question by entering your answers in the tabs below. Req 2A Req 2B 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 $3 per unit and increase unit sales by 10%. Net operating income

Explanation / Answer

a.

Unit sales=3600*1.1=3960 units

Hence net operating income increases by=(59600-57800)=$1800

b.Hence higher quality components should be used.

Current Proposed Sales (95*3600)=$342,000 (95*3960)=$376200 Variable cost (57*3600)=$205200 (57+3)*3960=$237600 Contribution margin 136800 $138600 Less:Fixed costs 79000 $79000 Net operating income $57800 $59600

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