Question

Brace Corporation sells and produces one single product, a maple baseball bat. Data regarding the maple bats appear below:

	Per Unit		Percent of Sales
Selling price	$	230	100%
Variable expenses		46	20%
Contribution margin	$	184	80%

Brace's fixed expenses are $150,000 per month. They are currently selling 1,000 baseball bats per month.

Brace's management is considering a new super-premium type of maple wood that would increase the unit variable cost by $80 per bat. Since the new maple wood would dramatically improve the company's product, the marketing manager predicts that monthly sales would increase by 700 units.

Required:

What should be the overall effect on Brace Corporation's company's monthly net operating income if the new maple wood is used and fixed expenses are unchanged? (Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

Change in net operating income

$

Answer 1

Solution:
	Change in net operating income	-7,200
Working Notes:
	Current Net operating income
	= Total current sales unit x contribution margin per unit - Total fixed cost
	=1,000 x $184 - $150,000
	=$184,000-$150,000
	=$34,000
New super-premium type of maple wood
	Variable cost increase by $80 per unit means contribution margin will decrease by $80 per unit
	New contribution margin per unit= Old contribution margin per unit - Increase in variable cost per unit
		=$184-$80
		=$104
	Now sales unit will increase by 700 units means total sales per month = 1000+700=1,700 units
	New Net operating income
	= Total sales unit x new contribution margin per unit - Total fixed cost
	=1,700 x $104 - $150,000
	=176,800-$150,000
	=$26,800
	Change in net operating income = New net operating income - current net operating income
		=$26,800-$34,000
		=-7,200
Please feel free to ask if anything about above solution in comment section of the question.