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Data for Hermann Corporation are shown below:
| Per Unit | Percent of Sales | |
| Selling price | $ 80 | 100% |
| Variable expenses | 52 | 65 |
| Contribution margin | $ 28 | 35% |
Fixed expenses are $76,000 per month and the company is selling 4.600 units per month.
2-a. Refer to the original data. How much will net operating income increase (decrease) per month if the company uses higher- quality components that increase the variable expense by $5 per unit and increase unit sales by 25%.
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. How much will net operating income increase (decrease) per month if the company uses higher- quality components that increase the variable expense by $5 per unit and increase unit sales by 25%.
Net operating income by .
Should the higher-quality components be used?
Yes
No
♦ Relevant knowledge
The income statement reveals all the revenue and expenses of a firm over an extended period.On a contribution margin’s earnings report, the variable expense as well as fixed expenses are described separately.Variable expenses are first listed and a specific measurement of income known as the contribution margin can be calculated using the difference between variable expenses and sales.
Current net operating income
= Total contribution margin – Fixed cost
= (4,600×28) – 76,000 = 52,800
Projected net operating income
= (4,600+25%)×(28-5) – 76,000
= 56,250
Increase = 56.250 – 52.800
Net operating income increases by $3450
Yes