Data for Hermann Corporation are shown below: Fixed expenses are $85,000 per mon
ID: 2395472 • Letter: D
Question
Data for Hermann Corporation are shown below:
Fixed expenses are $85,000 per month and the company is selling 2,700 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 $5 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 $ 125 100 % Variable expenses 80 64 Contribution margin $ 45 36 % y $5 per unit. The marketing manager believes that the higher-quality product would increase sales by 20% per mont hange 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 20% per month. Calculate the change in total contribution margin. Total contribution margin by Req 2A Req 2B CD ? Prev 2 of 5 Next >Explanation / Answer
Hermann Corporation's Current contribution margin
Total Contribution margin = Units sold * Contribution margin per unit as given
= 2700 * $45
= $121500
2a. If management uses higher quality components then
Contribution per unit = Selling price - increased variable cost
= $125 - ($80 + $5)
= $125 - $85
= $40
Units expected to be sold = 2700 * 120%
= 3240
Therefore total contribution margin = Units sold * contribution per unit
= 3240 * $40
= $129600
= $129600 - $121500
= $8100
2b. Since the total contribution margin is higher in 2a , Hermann Corporation should use the higher quality components.
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