Question

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

	Per Unit			Percent of Sales
Selling price	$	290			100	%
Variable expenses		58			20	%
Contribution margin	$	232			80	%

Fixed expenses are $210,000 per month. The company is currently selling 2,000 units per month.

Required:

Management is considering using a new component that would increase the unit variable cost by $64. 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?

Answer 1

	Current	Proposed
Unit Sales	2000	(2000+700)=2700
Sales	(2000*290)=580,000	(2700*290)=783,000
Variable expenses	(2000*58)=116,000	2700*(58+64)=329400
Contribution margin	464,000	453600
Fixed expense	210,000	210,000
Net operating income	254,000	243,600

Hence decrease in Net operating income

=254,000-243,600=$10400.