Question

While city-100's unit contribution margin is low, it is still positive. Conceptually, how can the controller's proposal – to stop producing and selling city-100's and instead make super-300's for inventory – provide the division with a higher NOI?

Answer 1

The controller's proposal to make super-300's instead of city-100's can result in a higher Net Operating Income (NOI) by increasing revenue and covering fixed costs more effectively.

Step-by-step explanation:

The controller's proposal to stop producing and selling city-100's and instead make super-300's for inventory can provide the division with a higher Net Operating Income (NOI) because of the concept of contribution margin. The unit contribution margin is the amount each unit contributes to covering fixed costs and generating profit. Even though city-100's unit contribution margin is low, it is still positive, meaning it contributes to covering fixed costs.

However, by producing and selling super-300's with a higher unit contribution margin, the division can generate more revenue and cover fixed costs more effectively, resulting in a higher NOI.