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?
A)increase of $54,400
B)decrease of $54,400
C)decrease of $6,400
D)increase of $6,400

Question

Quizplus · Accepted Answer

To calculate the effect on the net operating income, we need to use the contribution margin approach:

Increase in revenue = 400 units x $40/unit = $16,000 
Increase in variable costs = 400 units x $8/unit = $3,200

The contribution margin will increase by $12,800 ($16,000 - $3,200).

Therefore, the overall effect on the monthly net operating income will be an increase of $6,400 ($12,800/2). Therefore, the correct answer is D.

This Question Is to Be Considered Independently of All Other