Data concerning Sumter Corporation's single product appear below: Per Unit Percent of Sales Selling Price $220...

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!

Solutions

Expert Solution

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

ekkarill92 answered 10 months ago

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