Question

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

	Per Unit			Percent of Sales
Selling price	$	260			100	%
Variable expenses		65			25	%
Contribution margin	$	195			75	%

Fixed expenses are $180,000 per month. The company is currently selling 1,300 units per month.

Required:

Management is considering using a new component that would increase the unit variable cost by $54. Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 400 units. What should be the overall effect on the company's monthly net operating income of this change if fixed expenses are unaffected? (Negative amount should be indicated by a minus sign.)

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

	Per Unit			Percent of Sales
Selling price	$	260			100	%
Variable expenses		65			25	%
Contribution margin	$	195			75	%

Fixed expenses are $180,000 per month. The company is currently selling 1,300 units per month.

Required:

Management is considering using a new component that would increase the unit variable cost by $54. Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 400 units. What should be the overall effect on the company's monthly net operating income of this change if fixed expenses are unaffected? (Negative amount should be indicated by a minus sign.)

Change in net operating income?

Answer 1

Answer:-The overall effect on the company’s monthly net operating income will be decreased by $13800 (ie- $73500 - $59700).Hence management should not in consider new component because it will decrease the net operating income.

Explanation:-

Nice Corporation
Net operating income statment
Particulars	Current scenerio	Proposed scenerio
	$	$
Sales	1300 units*$260 per unit =338000	(1300 units+400 units0*$260 per unit =442000
Less:- Variable expenses	1300 units*$65 per unit =84500	(1300 units+400 units)*($65 per unit+$54per unit) =202300
Contribution margin	253500	239700
Less:- Fixed expenses	180000	180000
Net Operating income	73500	59700