Calderon Corporation produces and sells a single product. Data concerning that p

Question

Calderon Corporation produces and sells a single product. Data concerning that product appear below: Fixed expenses are $220,000 per month. The company is currently selling 1,900 units per month. Management is considering using a new component that would increase the unit variable cost by $38. Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 300 units. Required: What should be the overall effect on the company's monthly net operating income of this change if fixed expenses are unaffected?

Explanation / Answer

Solution.

Change in operating Income = $224,600 - $211,200 = $13,400.

Particulars Amount Sale              570,000 1900x$300 Variable expense            (125,400) 1900x$66 Contribution margin              444,600 Fixed Cost            (220,000) Operating Income              224,600 Particulars Amount Sale              660,000 2200x$300 Variable expense            (228,800) 2200x$104 Contribution margin              431,200 Fixed Cost            (220,000) Operating Income              211,200

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