Data for Hermann Corporation are shown below: Selling price Variable expenses Co
ID: 2337479 • Letter: D
Question
Data for Hermann Corporation are shown below: Selling price Variable expenses Contribution margin Per Unit 39 S 26 Percent of Sales 100% 60 40% $ 65 Fixed expenses are $73,000 per month and the company is selling 4,300 units per month 2-a. Refer to the original data. Management is considering using higher-quality components that would increase the variable expense by $5 per unit. The marketing manager believes that the higher-quality product would increase sales by 25% per month. Calculate the change in total contribution margin. 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. Management is considering using higher-quality components that would increase the variable expense by $5 per unit. The marketing manager believes that the higher-quality product would increase sales by 25% per month. Calculate the change in total contribution margin. Total contribution marginExplanation / Answer
Contribution Margin before change in sales and Variable cost
Contribution Margin per unit = Selling price per unit – variable cost per unit
= $65 – 39
= $26 per unit
Contribution Margin = Sales unit x Contribution per unit
= $4,300 units x $26 per unit
= $1,11,800
Contribution Margin after change in sales and Variable cost
Revised sales unit = 4,300 units x 125% = 5,375 units
Revised contribution margin per unit = Selling price per unit – Revised variable cost per unit
= $65 – [$39 + 5]
= $21 per unit
Contribution Margin = Sales unit x Contribution per unit
= $5,375 x $21 per unit
= $112,875
Change in total contribution margin
Change in total contribution margin
= $112,875 – 111,800
= $1,075
“Total Contribution Margin CHANGE by $1,075”
YES, The higher quality components shall be used, since it gives the higher contribution margin
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