Exercise 5-5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume [LO5-4]

[The following information applies to the questions displayed below.]

Data for Hermann Corporation are shown below:

	Per Unit				Percent of Sales
Selling price	$	140				100	%
Variable expenses		91				65
Contribution margin	$	49				35	%

Fixed expenses are $88,000 per month and the company is selling 3,000 units per month.

Garrison 16e Rechecks 2017-05-02

Exercise 5-5 Part 2

2-a. Refer to the original data. Management is considering using higher-quality components that would increase the variable expense by $6 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?