Rubber City Cycles manufactures carbon fiber bicycle frames for professional racing and avid amateur cyclists. Rubber City has found a CNC (computer numerical control)machine that will significantly reduce manufacturing waste while improving the quality of the frames. The new CNC machine will increase annual fixed costs by $13,750, but will decrease variable cost per unit by $150. Rubber City expects to sell 750 frames next year. Annual data for the current system are as follows:
By what amount will Rubber City's operating income increase (decrease)if they purchase the new CNC machine?

Question

Rubber City Cycles manufactures carbon fiber bicycle frames for professional racing and avid amateur cyclists. Rubber City has found a CNC (computer numerical control)machine that will significantly reduce manufacturing waste while improving the quality of the frames. The new CNC machine will increase annual fixed costs by $13,750, but will decrease variable cost per unit by $150. Rubber City expects to sell 750 frames next year. Annual data for the current system are as follows:
 By what amount will Rubber City's operating income increase (decrease)if they purchase the new CNC machine?

Quizplus · Accepted Answer

To calculate the change in operating income, we need to calculate the current operating income and the operating income if the new CNC machine is purchased.

Current operating income = (750 x $1,200) - $54,000 = $846,000
(Where 750 is the number of frames produced and sold, $1,200 is the total cost per frame (fixed and variable costs), and $54,000 is the total fixed cost)

Operating income with the new CNC machine = (750 x $1,050) - $67,750 = $717,500
(Where $1,050 is the total cost per frame (fixed and variable costs) with the new CNC machine, and $67,750 is the total fixed cost with the new machine)

Therefore, the change in operating income = $717,500 - $846,000 = ($128,500) or ($98,750) rounded to the nearest thousand.

The correct answer is A) ($98,750).

Rubber City Cycles Manufactures Carbon Fiber Bicycle Frames for Professional