Question

Lisbon Corporation is analyzing the following costs with respect to its decision to expand production and sales volume:

• New delivery equipment cost, $170,000.

• Annual depreciation expense on the new delivery equipment, $17,000.

• Old delivery equipment cost, $133,000.

• Annual depreciation expense on the old delivery equipment, $13,300.

• Annual decrease in utilities cost, $1,400.

• Annual increase in advertising costs, $6,800.

• Annual increase in sales, $81,000.

• Annual increase in cost of goods sold, $21,000.

• Annual increase in sales commissions, $1,500.

• Annual increase in shipping costs, $400.

How much is the differential annual net operating income? a. $36,500 b. $56,400 c. $49,000 d. $35,700

Answer 1

Calaculation of Differential annual net operating income

The correct option is

• D. $35700

Explanation:

Differential annual net operating income

= Net increase in Revenue - Net increase in expenses

.	($)	($)
Net increase in Revenue (sales)		$81000
Less:
Net increase in expenses
Increase in depreciation expense	$17000
Increase in advertising costs	$6800
Increase in cost of goods sold	$21000
Increase in sales commissions	$1500
Increase in shipping costs	$400
Decrease in utility costs	($1400)	($45300)
Differential Annual Net operating income		$35700

*Delivery annual equipment cost is neither an expense nor revenue. Hence it is not considered.

*Annual depreciation expense on old equipment is not considered since it was even incurred in previous years and doesn't affect Differential annual net operating income.

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