Question

Naumann Corporation produces and sells a single product. Data concerning that product appear below

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? (Negative amounts should be indicated by a minus sign.) 

Answer 1

Change in net operating income: 2 Sales 3 Less: Variable cost 4 Contribution margin 5 Less: Fixed cost 6 Net operating income 7 Change in net operating income B Current Expected $360,000 $528,000 $72.000 $248.600 $288,000 $279,400 $160,000 $160,000 $128.000 $119.400 (S8,600) 9 Net operating income would decrease by $8,600. Calculations are shown below: в Current 2 Sales =1500*240 3 Less: Variable cost =1500*48 4 Contribution margin =B2-B3 5 Less: Fixed cost 160000 6 Net operating income =B4-B5 7 Change in net operating income =C6-B6 с Expected =(1500+700)*240 =(1500+700*48+65) =C2-C3 160000 =C4-C5 8 9 Net operating income would decrease by $8,600.