Wertman Corporation produces and sells a single product with the following characteristics: The company is currently selling 3,000 units per month. Fixed expenses are $215,000 per month. Consider each of the following questions independently.
-This question is to be considered independently of all other questions relating to Wertman 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 $5. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 200 units. What should be the overall effect on the company's monthly net operating income of this change?

Question

Wertman Corporation produces and sells a single product with the following characteristics:  The company is currently selling 3,000 units per month. Fixed expenses are $215,000 per month. Consider each of the following questions independently.
-This question is to be considered independently of all other questions relating to Wertman 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 $5. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 200 units. What should be the overall effect on the company's monthly net operating income of this change?

Quizplus · Accepted Answer

The increase in sales revenue from selling 200 more units should be compared to the increase in variable costs. If the contribution margin per unit is greater than the $5 increase in variable cost, the net operating income will increase.

Wertman Corporation Produces and Sells a Single Product with the Following