8. The Flint Fan Corporation is considering the addition of a new model fan, the

Question

8.

The Flint Fan Corporation is considering the addition of a new model fan, the F-27, to its current products. The expected cost and revenue data for the F-27 fan are as follows: Avoidable fixed costs above relate solely to F-27 and Allocated common fixed costs per year above would not be impacted by the addition of the F-27 product. If the F-27 is added as a new product, it is expected that the contribution margin of other products will drop by $7,000 per year. Calculate the INCREASE or the DECREASE (you must specify which it is for your answer to be marked correct) and the dollar amount of the CHANGE in net operating income if the F-27 product is added next year.

Explanation / Answer

Contribution from F-27 4000 ( 58-38) $80,000 less: Contribution lost (7,000)        production fixed cost (20,000)        Selling avoidable fixed cost (30,000) Increase in profit $23,000

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