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Selling price$85 100% Variable expenses 51 60 Contribution margin$34 40% Fixed expenses are $77,000 per month and the company is selling 2,600 units per month. 2-a. Refer to the original data. How much will net operating income increase (decrease) per month if the company uses higher-quality components that increase the variable expense by $5 per unit and increase unit sales by 20%. 2-b. Should the higher-quality components be used

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Answer:

The company should use high-quality components. It will increase the net operating income by $2,080 (13,480 - 11,400).

Explanation:

First, we need to calculate the current net operating income:

Net operating income= total contribution margin - fixed costs

Net operating income= 2,600*34 - 77,000

Net operating income= $11,400

Now, the Net operating income including the high-quality component:

Unitary contribution margin= 85 - 56= $29

Number of units= 2,600*1.2= 3,120

Net operating income= 3,120*29 - 77,000

Net operating income= $13,480

The company should use high-quality components. It will increase the net operating income by $2,080 (13,480 - 11,400).

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