Question

ce Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $ 240 100 % Variable expenses 36 15 % Contribution margin $ 204 85 % Fixed expenses are $160,000 per month. The company is currently selling 1,100 units per month. Required: Management is considering using a new component that would increase the unit variable cost by $75. Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 600 units. What should be the overall effect on the company's monthly net operating income of this change if fixed

Answer 1

Ace Corporation

The overall effect on the company's monthly net operating income of this change if fixed is a reduction:

= $5,100

Step-by-step explanation:

a) Data and Calculations:

Per Unit Percent of Sales

Selling price $ 240 100 %

Variable expenses 36 15 %

Contribution margin $ 204 85 %

Fixed expenses are $160,000 per month

Current sales units per month = 1,100 units

Expected increase in unit variable cost = $75

New variable cost per unit = $111 ($36 + $75)

Expected increase in sales units per month = 600 units

New sales units per month = 1,700

Old Component New Component Overall Effect

Sales revenue $264,000 $408,000

Variable costs 39,600 188,700

Contribution margin $224,400 $219,300

Fixed expenses 160,000 160,000

Net operating income $64,400 $59,300 -$5,100