Question

Naumann Corporation produces and sells a single product. Data concerning that product appear below: Per UnitPercent of Sales Selling price$260 100% Variable expenses 39 15% Contribution margin$221 85% Fixed expenses are $180,000 per month. The company is currently selling 1,700 units per month. Required: Management is considering using a new component that would increase the unit variable cost by $45. Since the new component would improve 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 if fixed expenses are unaffected

Answer 1

Answer:

-$6,100

Explanation:

The computation of the overall effect on the company monthly net operating income is shown below:

But before that we need to do following calculations

New variable cost per unit is

= $39 per unit + $45 per unit

= $84  per unit

New contribution margin per unit is

= $260 per unit - $84 per unit

= $176  per unit

New unit monthly sales is

= 1,700 units + 400 units

= 2,100  units

Now New total contribution margin is

= 2,100 units × $176 per unit

= $369,600

And, the Current total contribution margin is

= 1,700 units × $221 per unit

=  $375,700

Therefore the Change in total contribution margin and in net operating income is

= New total contribution margin - current total contribution margin

= $369,600 - $375,700

= -$6,100