Data for Hermann Corporation are shown below: Per Unit S 80 Percent of Sales 100

Question

Data for Hermann Corporation are shown below: Per Unit S 80 Percent of Sales 100 % Selling price variable expense Contribution margin s 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. 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.

Explanation / Answer

2-a) Existing total contribution margin = 4600*28 = $   1,28,800 Revised total contribution margin, if higher quality components are used: Revised sales units = 4600*125%                                    5750 Revised contribution margin per unit = 80-57= $               23 Revised total contribution margin   $   1,32,250 Increase in total contribution margin = $         3,450 TOTAL CONTRIBUTION MARGIN INCREASES BY $3450 2-b) YES, THE HIGHER QUALITY COMPONENTS SHOULD BEUSED.

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