Question

Naumann 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 1,000 units per month.

Required:

Management is considering using a new component that would increase the unit variable cost by $56. Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 500 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 company's monthly net operating income

• Revised Variable cost per unit = $94 per unit ($38 + $56)
• Revised Contribution margin per unit = $96 per unit ($190 - $94)
• Revised number of units sold = 1,500 Units (1,000 units + 500 units)
• New Contribution margin = $144,000 (1,500 units x $96 per unit)
• Current Contribution margin = $152,000 (1,000 units x $152 per unit)
• Therefore, the company's monthly net operating income = -$8,000 ($144,000 - $152,000)

“Thus, the overall effect on the company's monthly net operating income would be -$8,000 (Negative)”