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

First, let's calculate the current contribution margin per unit:

Selling price per unit = $280
Variable cost per unit = $180
Contribution margin per unit = $100

Since the company is currently selling 6,000 units per month, the total contribution margin is:

Contribution margin per unit x Number of units sold = $100 x 6,000 = $600,000

Now, let's calculate the new contribution margin per unit:

Selling price per unit = $280
Variable cost per unit = $188 ($180 + $8)
Contribution margin per unit = $92 ($280 - $188)

Since the marketing manager predicts that monthly sales would increase by 400 units, the new number of units sold would be:

Current number of units sold + Increase in units sold = 6,000 + 400 = 6,400

Therefore, the total contribution margin with the new component would be:

New contribution margin per unit x New number of units sold = $92 x 6,400 = $588,800

To calculate the overall effect on the company's monthly net operating income, we need to compare the total contribution margin with and without the new component, and subtract the fixed expenses:

Net operating income with new component = Total contribution margin with new component - Fixed expenses
Net operating income with new component = $588,800 - $716,000
Net operating income with new component = -$127,200

As we can see, the new component would result in a decrease of $127,200 in the company's monthly net operating income. However, we need to take into consideration the additional benefits of the increased sales volume and the improved product features, which are not quantifiable in terms of dollars.

Bohlen Corporation Produces and Sells a Single Product