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Elodia [21]
3 years ago
5

2-a. Refer to the original data. How much will net operating income increase (decrease) per month if the company uses higher-qua

lity components that increase the variable expense by $4 per unit and increase unit sales by 20%. 2-b. Should the higher-quality components be used
Business
1 answer:
Vadim26 [7]3 years ago
8 0

The original data is :

Data for Hermann Corporation

                                          Per unit     Percent of sales

Selling price                         $ 75              100%

Variable expenses                  51                 68

Contribution margin             $ 24               32%

The fixed expenses are $ 75,000 per month and the company is selling 4000 units per month.

Solution :

                                                     Present             Proposed

Sales                                             300000            375000

Less : Variable cost                      204000           275000

Contribution margin                     96000               100000

Less : Fixed expenses             <u>    75000     </u>      <u>     75000    </u>

Net income                                   21000                25000

The net operating income :      Increases          4000

Net operating income = increased sales Net income - current sales net income.

Therefore the higher quality component should be used.                                                            

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