Hinsey Corporation produces and sells a single product. Data concerning the product appear below: Fixed expenses are $300,000 per month. The company is currently selling 4,000 units per month. Consider each of the following questions independently.
-This question is to be considered independently of all other questions relating to Hinsey 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 $11. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 500 units. What should be the overall effect on the company's monthly net operating income of this change?

Question

Hinsey Corporation produces and sells a single product. Data concerning the product appear below:  Fixed expenses are $300,000 per month. The company is currently selling 4,000 units per month. Consider each of the following questions independently.
-This question is to be considered independently of all other questions relating to Hinsey 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 $11. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 500 units. What should be the overall effect on the company's monthly net operating income of this change?

Quizplus · Accepted Answer

Total increase in variable cost = $11 x 4,500 = $49,500

Total increase in contribution margin = 500 units x ($120 - $69) = $25,500

Net effect on operating income = $25,500 - $49,500 = decrease of $24,000

Therefore, the answer is D, a decrease of $5,500.

Hinsey Corporation Produces and Sells a Single Product