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Data for Hermann Corporation are shown below: Selling price Variable expenses Co

ID: 2337479 • Letter: D

Question

Data for Hermann Corporation are shown below: Selling price Variable expenses Contribution margin Per Unit 39 S 26 Percent of Sales 100% 60 40% $ 65 Fixed expenses are $73,000 per month and the company is selling 4,300 units per month 2-a. Refer to the original data. Management is considering using higher-quality components that would increase the variable expense by $5 per unit. The marketing manager believes that the higher-quality product would increase sales by 25% per month. Calculate the change in total contribution margin. 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. Management is considering using higher-quality components that would increase the variable expense by $5 per unit. The marketing manager believes that the higher-quality product would increase sales by 25% per month. Calculate the change in total contribution margin. Total contribution margin

Explanation / Answer

Contribution Margin before change in sales and Variable cost

Contribution Margin per unit = Selling price per unit – variable cost per unit

= $65 – 39

= $26 per unit

Contribution Margin = Sales unit x Contribution per unit

= $4,300 units x $26 per unit

= $1,11,800

Contribution Margin after change in sales and Variable cost

Revised sales unit = 4,300 units x 125% = 5,375 units

Revised contribution margin per unit = Selling price per unit – Revised variable cost per unit

= $65 – [$39 + 5]

= $21 per unit

Contribution Margin = Sales unit x Contribution per unit

= $5,375 x $21 per unit

= $112,875

Change in total contribution margin

Change in total contribution margin

= $112,875 – 111,800

= $1,075

“Total Contribution Margin CHANGE by $1,075

YES, The higher quality components shall be used, since it gives the higher contribution margin