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27 January, 19:03

Nice Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $ 240 100 % Variable expenses 48 20 % Contribution margin $ 192 80 % Fixed expenses are $160,000 per month. The company is currently selling 1,500 units per month. Required: Management is considering using a new component that would increase the unit variable cost by $65. Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 700 units. What should be the overall effect on the company's monthly net operating income of this change if fixed expenses are unaffected

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  1. 27 January, 19:19
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    Therefore, the change in total contribution margin is equal to change in net operating income, so there is no change in fixed expenses and will not be affected.

    Explanation:

    The computation as per given question is given below:-

    Variable cost per unit

    = $48 + $65

    = $113

    Contribution margin per unit

    = $240 - $113

    = $127

    Unit Monthly sales

    = 1,500 + 240

    = 1,740

    Total contribution margin

    = 1,740 * $127

    = $220,980

    Total contribution margin

    = 1,500 * $192

    = $288,000

    So, change in total contribution margin and net operating income

    = $288,000 - $220,980

    = $67,020

    Therefore, the change in total contribution margin is equal to change in net operating income, so there is no change in fixed expenses and will not be affected.
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