Data for Hermann Corporation are shown below Per Unit Percent of Sales Selling P

Question

Data for Hermann Corporation are shown below Per Unit Percent of Sales Selling Price $90 100%( % of sales) Variable Expenses 63 70% ( % of sales) Contribution margin $27 30% ( % of sales) Fixed expenses are $30,000 per month and the company is selling 2,000 units per month. 1. How much will net operating income increase (decrease) per month if the company uses higher- quality components that increase the variable expense by $2 per unit and increase unit sales by 10%.

If you could please lay out the steps clearly. Someone else answered this question, but it did not seem clear to me. Thank you!

Explanation / Answer

Hermann Corporation

Contribution margin Income statement

Increased units sales = 2,000 + (2,000*10%) = 2,200

Increased variable expenses per unit = $63 + $2 = $65

Hermann Corporation

Contribution margin Income statement

Increase in net operating income = $25,000 - $24,000 = $1,000

Sales (2,000 units * $90 per unit) $180,000 Variable expenses (2,000 units * $63 per unit) $126,000 Contribution margin $54,000 Fixed expenses $30,000 Net operating income $24,000

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