Question

zark Metal Company makes a single product that sells for $41.5 per unit. Variable costs are $28.1 per unit, and fixed costs total $65,165 per month. Assume that the firm adds another product to its product line and that the new product sells for $21 per unit, has variable costs of $14 per unit, and causes fixed expenses in total to increase to $81,000 per month. Calculate the firm's operating income if 6,100 units of the original product and 4,800 units of the new product are sold each month. For the original product, use the selling price and variable cost data given in the problem statement

Answer 1

The firm's operating income, with 6,100 units of the original product and 4,800 units of the new product sold, is calculated by applying the contribution margin of each and subtracting the total fixed costs. The resulting operating income is $34,340.

Step-by-step explanation:

To calculate the firm's operating income, we need to determine the contribution margin for both products, subtract the total fixed costs, and sum the results. The contribution margin for each unit of the original product is the selling price minus variable costs, which is $41.5 - $28.1 = $13.4 per unit. For the new product, it is $21 - $14 = $7 per unit. Multiplying the contribution margin by the number of units sold gives us the total contribution for each product.

• Original product: $13.4 * 6,100 = $81,740
• New product: $7 * 4,800 = $33,600

Finally, we subtract the total fixed costs from the combined contribution margin to calculate the operating income:

Total contribution margin: $81,740 + $33,600 = $115,340

Operating income = Total contribution margin - Total fixed costs

Operating income = $115,340 - $81,000 = $34,340