The Cabinet Shoppe is considering the addition of a new line of kitchen cabinets to its current product lines. Expected cost and revenue data for the new cabinets are as follows:Annual sales.$\quad$$\quad$5,000 units
Selling price per unit.$\quad$$\quad$£180
Variable costs per unit:
Production.$\quad$$\quad$£120
Selling.$\quad$$\quad$£15
Avoidable foed costs peryear:
Production.$\quad$$\quad$£40,000
Selling.$\quad$$\quad$£80,000
Allocated common fixed costs per year.$\quad$$\quad$£45,000
-If the new cabinets are added, it is expected that the contribution margin of other product lines at the cabinet shop will drop by £20,000 per year. If new cabinet product line is added next year, the increase in net operating income resulting from this decision would be

A)£80,000.
B)£225,000.
C)£125,000.
D)£105,000.

Question

The Cabinet Shoppe is considering the addition of a new line of kitchen cabinets to its current product lines. Expected cost and revenue data for the new cabinets are as follows:Annual sales.$\quad$$\quad$5,000  units
Selling price per unit.$\quad$$\quad$£180
 Variable costs per unit:
Production.$\quad$$\quad$£120
Selling.$\quad$$\quad$£15
Avoidable foed costs peryear:
Production.$\quad$$\quad$£40,000
Selling.$\quad$$\quad$£80,000
Allocated common fixed costs per year.$\quad$$\quad$£45,000
-If the new cabinets are added, it is expected that the contribution margin of other product lines at the cabinet shop will drop by £20,000 per year. If new cabinet product line is added next year, the increase in net operating income resulting from this decision would be

A)£80,000.
B)£225,000.
C)£125,000.
D)£105,000.

Quizplus · Accepted Answer

The increase in net operating income can be calculated as follows: Annual sales revenue = 5,000 units * £180/unit = £900,000. Total variable costs = (5,000 units * £120/unit for production) + (5,000 units * £15/unit for selling) = £600,000 + £75,000 = £675,000. Contribution margin = £900,000 - £675,000 = £225,000. Subtract avoidable fixed costs (production + selling) = £40,000 + £80,000 = £120,000. Subtract the decrease in contribution margin from other product lines = £20,000. Increase in net operating income = £225,000 - £120,000 - £20,000 = £85,000. However, the allocated common fixed costs of £45,000 are not relevant to this decision since they would remain the same whether or not the new product line is added. Therefore, they should not be subtracted in calculating the increase in net operating income. This appears to be an error in the calculation options provided, as none of the options correctly reflects the calculation based on the information given. Given the options, the closest correct approach would be to consider the net effect without mistakenly subtracting the irrelevant allocated common fixed costs, but since the calculation mistake led to no exact match, the intended correct answer might be a misinterpretation of the provided data. Based on the correct calculation method, the answer should be recalculated without considering the £45,000, which is not avoidable or directly attributable to the decision.

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