Question

Big Bang Corporation manufactures a single product—a computer monitor. The following information is related to the company’s monthly operations: Total Per Unit Sales (700 unites)…………… $210,000 $300 Variable expenses…………… 80,500 115 Contribution Margin………… 129,500 185 Fixed expenses……………… 67,500 Net Operating Income……… 62,000 Big Bang’s production management decided to automate the production process of monitors by upgrading its machinery. The improved process will reduce direct-labor costs by $10 per unit. However, the upgrade will include an increase in the cost of leased equipment of $7,500 a month. The company further believes that the upgrade will make the monitors more reliable, which will increase monthly sales by 5%. What will be the total effect of the upgrade on Big Bang’s monthly net operating income?

Answer 1

Effect of the upgrade on big bangs monthly net operating income

$(Amt)

Sales 220500

(700*300p.u)

(-)Vari.cost 77175

(105*735)

=Contri. Margin 143325

(195*735)

(-)Fixed cost 75000

(67500+7500)

Net operating income 68325 answer

Notes

1) increase in sales by 5% hence 700 units +5%=735unit

2) selling price remain 300 p.u because no information about S.P is given.

3) previously V.c is 115$ P.u but now it will be (115-10) =105$.because direct labour reduce by 10$ p.u & it includes in variable cost ,so we reduce 10$ from V.C

4) Fixed cost increased by 7500$ so it becomes (67500+7500)=75000$

5) Due to reduction in direct labour by 10$ its contribution margin increased by 10 $ (185+10)=195$

6)units now 735 so varible cost also increase because variable cost is per unit same but with increase in total unit it will change.