Question

Naumann Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $ 190 100 % Variable expenses 38 20 % Contribution margin $ 152 80 % Fixed expenses are $110,000 per month. The company is currently selling 1,000 units per month. Required: Management is considering using a new component that would increase the unit variable cost by $56. Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 500 units. What should be the overall effect on the company's monthly net operating income of this change if fixed expenses are unaffected

Answer 1

-$8,000

Step-by-step explanation:

With regards to the above, we need to compute first the variable cost per unit

Variable cost per unit = $38 per unit + $56 per unit = $94

New contribution margin per unit = $190 per unit - $94 per unit = $96

New unit monthly sales

= 1,000 units + 500 units

= 1,500 units

New total contribution margin

= 1,500 units × $96 per unit

= $144,000

The current total contribution margin

= 1,000 units × $152 per unit

= $152,000

Therefore, the change in total contribution margin and in net operating income

= New total contribution margin - Current total contribution margin

= $144,000 - $152,000

= -$8,000