The Tapan Corporation is considering the addition of a new model fan, the F-27,

Question

The Tapan 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:

Annual Sales = 4000 units

Unit Selling Price = $58

Unit Variable Cost:

Production = $34

Selling $4

Avoidable fixed cost per year:

Production = $20,000

Selling = $30,000

Allocated common fixed costs per year = $55,000

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

**Allocated fixed cost is irrelevant as it will be ibcurred whether F27 is undertaken or not

so ne income will "Increase" by $ 23000

Sales   [58*4000] 232000 Less:Variable production     [34*4000] - 136000 Variable selling     [4*4000] - 16000 contribution 80000 Less:Avoidable Fixed cost    [20000+30000] -50000 loss of contribution -7000 net income 23000

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