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?

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?

Quizplus · Accepted Answer

Under the new component scenario, the unit variable cost would increase by $8. Thus, the new unit variable cost would be $34 ($26 + $8). Assuming that the marketing manager's prediction holds true, monthly sales would increase by 400 units (from 6,000 to 6,400).

Thus, under the new component scenario:

Sales revenue = 6,400 x $46 = $294, 400 
Variable expenses = 6,400 x $34 = $217, 600 
Contribution margin = $294, 400 - $217, 600 = $76, 800 
Fixed expenses = $716, 000 
Net operating loss= $716, 000 - $76, 800 = $639, 200

Under the current scenario:

Sales revenue = 6,000 x $46 = $276, 000 
Variable expenses = 6,000 x $26 = $156, 000 
Contribution margin = $276, 000 - $156, 000 = $120, 000 
Fixed expenses = $716, 000 
Net operating loss = $716, 000 - $120, 000 = $596, 000

The overall effect on the company's monthly net operating income would be an increase of $6, 400 ($639, 200 - $596, 000). Thus, the correct answer is D.

Bohlen Corporation Produces and Sells a Single Product