Question

Fixed expenses are $490,000 per month. The company is currently selling 6,000 units per month. Management is considering using a new component that would increase the unit variable cost by $5. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 300 units. What should be the overall effect on the company's monthly net operating income of this change

Answer 1

$2,100 decrease in net operating income

Step-by-step explanation:

For determining the overall effect we have to determine the contribution margin under each plan

In the current situation, the contribution margin is

= Sales units × (Selling price per unit - variable expense per unit)

= 6,000 units × ($140 - $42)

= 6,000 units × 98 units

= $588,000

In the proposed situation, the contribution margin is

= Sales - variable cost

where,

Sales units is

= 6,000 units + 300 units × $140

= $882,000

And, the variable cost is

= 6,000 units + 300 units × 42 units + 5 units

= $296,100

So, the contribution margin is

= $882,000 - $296,100

= $585,900

Now the overall effect is

= $585,900 - $588,000

= $2,100 decrease in net operating income