Data concerning Lancaster Corporation\'s single product appear below: Per Unit P

Question

Data concerning Lancaster Corporation's single product appear below: Per Unit Percent of sales Selling price $212 100% Variable expenses 66 31% Contribution margin $146 69% Fixed expenses are $111,000 per month. The company is currently selling 1,600 units per month. Management is considering using a new component that would increase the unit variable cost by $44. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 460 units. What should be the overall effect on the company's monthly net operating income of this change?

Explanation / Answer

Current Net Operating Income = Contribution Margin - Fixed Costs

= 1,600 * 212 * 69% - 111,000 = $123,048

New Variable cost = $66 + $44 = $110, So Contribution = $212 - $110 = $102, i.e. 48%

New Net Operating Income = Contribution Margin - Fixed Costs

= 1,600 * 212 * 48% - 111,000 = $51,816

Net Decrease = $71,232

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