Houpe Corporation produces and sells a single product. Data concerning that prod

Question

Houpe Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $ 140 100 % Variable expenses 42 30 % Contribution margin $ 98 70 % Fixed expenses are $490,000 per month. The company is currently selling 6,000 units per month. Management is considering using a new component that would increase the unit variable cost by $5. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 300 units. What should be the overall effect on the company's monthly net operating income of this change? Multiple Choice decrease of $27,900 increase of $2,100 decrease of $2,100 increase of $27,900

Explanation / Answer

Hence overall effect=Decrease in net operating income=(98000-95900)=$2100.

Current Proposed Sales (140*6000)=$840,000 140*(6000+300)=$882000 Less:VC (42*6000)=$252000 (42+5)*(6000+300)=$296100 Contribution margin $588000 $585900 Less:Fixed expenses (490000) (490000) Net operating income $98000 $95900

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