Required information [The following information applies to the questions display

Question

Required information

[The following information applies to the questions displayed below.]

Data for Hermann Corporation are shown below:

Fixed expenses are $78,000 per month and the company is selling 3,500 units per month.

Garrison 16e Rechecks 2017-05-02

2-a. Refer to the original data. Management is considering using higher-quality components that would increase the variable expense by $4 per unit. The marketing manager believes that the higher-quality product would increase sales by 20% per month. Calculate the change in total contribution margin.

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

Per Unit Percent of Sales Selling price $ 90 100 % Variable expenses 63 70 Contribution margin $ 27 30 %

Explanation / Answer

1.Hence change=increase=(96600-94500)=$2100

2.Hence higher-quality components should be used.

Current Proposed Sales (90*3500)=$315000 (315000*1.2)=$378000 Less:VC (63*3500)=$220500 (63+4)*3500*1.2=$281400 Contribution margin $94500 $96600

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