Question

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

	Per Unit				Percent of Sales
Selling price	$	196				100	%
Variable expenses		49				25	%
Contribution margin		147				75	%

Fixed expenses are $1,250,000 per month. The company is currently selling 9,400 units per month. Management is considering using a new component that would increase the unit variable cost by $7. Since the new component would increase the features of 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?

a. decrease of $70,000

b. decrease of $4,200

c.increase of $70,000

d.increase of $4,200

Answer 1

Change in net operating income is increase by $4200 (OPTION - d)

CALCULATION IS HEREUNDER :

Calculation of total income under present conditions for a month (Sales units = 9400 UNITS)

Particulars	per unit ( in $)	total
Sales	196	$1842400
Variable cost	49	$460600
Contribution	147	$1381800
Fixed cost	given	$1250000
Net operating income		$131800

Calculation of net operating income per month under proposed conditions for a month (Sales UNITS = 9400UNITS + 500UNITS =9900UNITS )

Particulars	per unit ( in $)	total
Sales	196	$1940400
Variable cost	49+7 = 56	$554400
Contribution	140	1386000
Fixed cost	given	$12500000
Net operating income		136000

Change in net operating income is $136000 - $131800 = $4200

Note: variable cost changes in total but remains the same per unit . Fixed cost changes in per unit when the units sold changes but not in tatal .