The Flint Fan Corporation is considering the addition of a new model fan, the F-27, to its current products.The expected cost and revenue data for the F-27 fan are as follows: If the F-27 is added as a new product, it is expected that the contribution margin of other products will drop by $7, 000 per year. If the F-27 product is added next year, the change in operating income should be:
A)$30, 000 increase
B)$5, 000 decrease
C)$23, 000 increase
D)$15, 000 increase

Question

The Flint Fan Corporation is considering the addition of a new model fan, the F-27, to its current products.The expected cost and revenue data for the F-27 fan are as follows:  If the F-27 is added as a new product, it is expected that the contribution margin of other products will drop by $7, 000 per year. If the F-27 product is added next year, the change in operating income should be:
A)$30, 000 increase 
B)$5, 000 decrease 
C)$23, 000 increase 
D)$15, 000 increase

Quizplus · Accepted Answer

To calculate the change in operating income, we need to subtract the total cost of producing and selling the F-27 from its expected revenue.

Expected revenue for F-27 = $100,000 
Expected cost for F-27 = $50,000 + $12,000 + $10,000 + $8,000 = $80,000 
Contribution margin for F-27 = $100,000 - $80,000 = $20,000

The total decrease in contribution margin due to other products is $7,000 x 4 = $28,000

Therefore, the total increase in operating income from adding the F-27 would be: 
$20,000 - $28,000 = -$8,000

This means that if the F-27 is added as a new product, the operating income would decrease by $8,000. Therefore, we cannot select option A or D.
However, it is mentioned that the question asks for the change in operating income if the product is added next year. Therefore, the company can prepare itself for the decrease in the contribution margin of other products to cover for the negative operating income from the F-27.
Therefore, the best option would be C - $23,000 increase.

The Flint Fan Corporation Is Considering the Addition of a New