Nice Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $ 190 100 % Variable expenses 38 20 % Contribution margin $ 152 80 % Fixed expenses are $110,000 per month. The company is currently selling 1,400 units per month. Required: Management is considering using a new component that would increase the unit variable cost by $48. Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 600 units. What should be the overall effect on the company's monthly net operating income of this change if fixed expenses are unaffected? (Negative amount should be indicated by a minus sign.)

Question

Yusuf Allison

Business

17 January, 16:24

Nice Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $ 190 100 % Variable expenses 38 20 % Contribution margin $ 152 80 % Fixed expenses are $110,000 per month. The company is currently selling 1,400 units per month. Required: Management is considering using a new component that would increase the unit variable cost by $48. Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 600 units. What should be the overall effect on the company's monthly net operating income of this change if fixed expenses are unaffected? (Negative amount should be indicated by a minus sign.)

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Ashlee Gardner · Answer 1

The opearing income will increase by 71,200

Explanation:

ΔSales for 600

↓CM by 10 (38 Variable - 48 variable) = - 10

First:

We have 600 more of sale at this new CM

ΔSales for 600 x Contribution Margin per unit 142 = Δ85,200

Second:

Our other units will have a decrease in their contribution

1,400 x ↓CM (-10) = ↓-14,000

Net 71,200

The opearing income will increase by 71,200