Bohlen Corporation produces and sells a single product. Data concerning that product appear below: Fixed expenses are $716,000 per month. The company is currently selling 6,000 units per month. Consider each of the following questions independently. This question is to be considered independently of all other questions relating to Bohlen Corporation. Refer to the original data when answering this question.
Management is considering using a new component that would increase the unit variable cost by $8. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 400 units. What should be the overall effect on the company's monthly net operating income of this change?
A)increase of $54,400
B)decrease of $54,400
C)decrease of $6,400
D)increase of $6,400

Question

Bohlen Corporation produces and sells a single product. Data concerning that product appear below:  Fixed expenses are $716,000 per month. The company is currently selling 6,000 units per month. Consider each of the following questions independently. This question is to be considered independently of all other questions relating to Bohlen Corporation. Refer to the original data when answering this question.
Management is considering using a new component that would increase the unit variable cost by $8. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 400 units. What should be the overall effect on the company's monthly net operating income of this change?
A)increase of $54,400 
B)decrease of $54,400 
C)decrease of $6,400 
D)increase of $6,400

Quizplus · Accepted Answer

Using the new component will increase both the unit sales and unit variable cost. The new contribution margin per unit will be:

$60 - $30 - $8 = $22

With the predicted increase in sales of 400 units, the total contribution margin increase will be:

$22 × 400 = $8,800

The fixed expenses remain the same at $716,000. Thus, the increase in contribution margin will directly result in an increase in net operating income, which is:

$8,800 - $0 = $8,800

Therefore, the overall effect on the company's monthly net operating income will be an increase of $6,400 ($8,800 increase in contribution margin - $2,400 increase in variable costs ($8 increase in unit variable cost × 400 increase in sales)) as compared to the original net operating income of $2,400.

Bohlen Corporation Produces and Sells a Single Product