In: Accounting
Data concerning Sumter Corporation's single product appear below:
Per Unit | Percent of Sales | |
Selling Price | $220 | 100% |
Variable Expense | 66 | 30% |
Contribution Margin | $154 | 70% |
Fixed expenses are $1,024,000 per month. The company is currently selling 8,000 units per month.
Required:
Management is considering using a new component that would increase the unit variable cost by $6. Since the new component would improve the company's product, the marketing manager predicts that monthly slaes would increase by 300 units. What should be the overall effect on the company's monthly net operating income of this change if fixed expenses are unaffected? Show your work!
A Net operating income under existing arrangent
Particular | Amount |
---|---|
Sales per unit | $220 |
Variable Expense per unit | $66 |
Contribution Margin per unit | $154 |
Total Contribution Margin ( 8,000 units * $154) | $1,232,000 |
Less Fixed Cost | $1,024,000 |
Net operating income | $208,000 |
B Net operating income if considering using a new component
Particular | Amount |
---|---|
Sales per unit | $220 |
Variable Expense per unit ($66 + $6) | $72 |
Contribution Margin per unit | $148 |
Total Contribution Margin ( 8,300 units * $148) | $1,228,400 |
Less Fixed Cost | $1,024,000 |
Net operating income | $204,400 |
Overall effect on the company's monthly net operating income :
Net operating income if considering using a new component - Net operating income under existing arrangent
= $204,400 - $208,000 = ($3,600)
Conclusion : If new component is used instead of existing arrangment than the overall company's monthly net operating income shall decrease by $3,600