Data concerning Bunck Corporation's single product appear below: Fixed expenses are $202, 000 per month.The company is currently selling 2, 000 units per month.Management is considering using a new component that would increase the unit variable cost by $18.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?

Question

Data concerning Bunck Corporation's single product appear below:  Fixed expenses are $202, 000 per month.The company is currently selling 2, 000 units per month.Management is considering using a new component that would increase the unit variable cost by $18.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?

Quizplus · Accepted Answer

Total contribution margin from 2,000 units = (2,000 x $105) = $210,000 
Contribution margin per unit after the proposed change = ($123 - $75) = $48
Total contribution margin from 2,400 units = (2,400 x $48) = $115,200

Additional contribution margin from the proposed change = $115,200 - $210,000 = $ (94,800)

Since the contribution margin from the proposed change is positive, the company's net operating income will increase. The increase will be equal to the additional contribution margin generated by the proposed change.

Therefore, the overall effect on the company's monthly net operating income of this change is an increase of $11,200.

Data Concerning Bunck Corporation's Single Product Appear Below: Fixed