Data for Hermann Corporation are shown below: Per unit Percentage of sale
Selling price $75 100%
expenses 51 68
contribution margin 24% 32%

Fixed expenses are $75,000 per month and the company is selling 4,000 units per month.

Required:
a. How much will net operating income increase (decrease) per month if the company uses higher-quality components that increase the variable expense by $4 per unit and increase unit sales by 25%.
b. Should the higher-quality components be used?

Instructions are below.

Explanation:

Giving the following information:

Selling price= $75

expenses= $51

contribution margin= $24

Fixed expenses are $75,000 per month and the company is selling 4,000 units per month.

Higher quality:

Variable cost= $55

Increase in sales= 4,000*1.25= 5,000

First, we need to determine the effect on the income:

Effect on income= 1,000*(75 - 55) - 4,000*4

Effect on income= $4,000 increase

The higher quality component should be used because of income increase.

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