Question

Management is considering using a new component that would increase the unit variable cost by $50. 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

Because fixed costs will not change, the overall effect on the company's monthly net operating income will be equal to the contribution margin of the product once the new component is added.

Step-by-step explanation:

The contribution margin is equal to: Revenue - Variable Costs.

We already know that the variable cost will be increased by $50 once new component is added, and that monthly sales are expected to increase by 500 units after that.

Depending on the price of the product, the amount sold, and the variable costs, we get the contribution margin, and this contribution margin will be exactly the same as the overall effect on the net operating income.