Question

Key Company is considering the addition of a new product to its current lines. The expected cost and revenue data for the new product are as follows :Annual Sales : 2500 unitsSelling Price Per Unit : $304Variable Cost Per Unit :Production : $125Selling : $49Avoidable Fixed Cost Per Year :Production : $50,000Selling : $75,000Allocating common corporate cost per year : $55,000If the new product is added, the combined contribution margin of the other , existing product lines is expected to drop $65,000 per year, the common corporate costs would be unaffected by decision of whether to add the product. If new product is added next year, the increase in net operating income from this decision would be :A) 325,000 B) 200,000 C) 145,000 D) 135,000 E) None

Answer 1

D) 135,000

Step-by-step explanation:

The increase in net operating income would be

= Contribution margin per unit × number of units sold - production fixed cost - selling fixed cost - expected drop in contribution margin

= $130 × 2,500 units - $50,000 - $75,000 - $65,000

= $325,000 - $50,000 - $75,000 - $65,000

= $135,000

The contribution margin per unit would be

= Contribution margin per unit = Selling price per unit - Variable expense per unit

= $304 - $125 - $49

= $130