Wrobbel Corporation produces and sells a single product. Data concerning that pr

Question

Wrobbel Corporation produces and sells a single product. Data concerning that product appear below:

Per Unit Percent of Sales Selling price $ 260 100 %

Variable expenses 39 15 %

Contribution margin $ 221 85 %

Fixed expenses are $180,000 per month.

The company is currently selling 1,700 units per month.

Management is considering using a new component that would increase the unit variable cost by $45.

Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 400 units.

Required:

What should be the overall effect on the company's monthly net operating income of this change if fixed expenses are unaffected? (Negative amount should be indicated by a minus sign.)

Change in Net Operating Income:

Explanation / Answer

New variable cost per unit ($39 per unit + $45 per unit) $84 New contribution margin per unit ($260 per unit - $84 per unit) $176 New unit monthly sales (1,700 units + 400 units) 2,100 New total contribution margin: 2,100 units × $176 per unit $369,600 Current total contribution margin: 1,700 units × $221 per unit $375,700 Change in total contribution margin and in net operating income -$6,100

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