Per Unit . % of sales Selling price . $75 . 100% Variable Expenses . $45 . 60% C

Question

      Per Unit .       % of sales

Selling price . $75 . 100%

Variable Expenses . $45 . 60%

Contribution Margin . $30 40%

Fixed expenses are $75,000 per month and the company is selling 3,000 units per month.

2. Refer to the original data . Management is considering using higher quality components that would increase variable cost by $3 per unit. The manager believes that the higher quality product would increase sales by 15% per month. Should the higher - quality components be used. Show all calculations to justify your answers or response.

Explanation / Answer

New sales=(225000*1.15)=$258750

Hence new sales(unit)=(258750/75)=$3450

VC/unit proposed=(45+3)=$48

Increase in net operating income=(18150-15000)=$3150

Hence higher-quality component should be used.

Current Proposed sales (75*3000)=$225000 (225000*1.15)=$258750 Less:VC (225000*0.6)=$135000 (3450*48)=$165600 Contribution margin 90000 93150 Less:FC 75000 75000 Net operating income 15000 18150

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