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 Variable expenses Contribution margin 180 36 100% 20% 80% $144 Fixed expenses are $100,000 per month. The company is currently selling 1,500 units per month. Management is considering using a new component that would increase the unit variable cost by $50. Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 700 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 26

Explanation / Answer

Company's operating profit will decline by $9,200 i.e -9,200

Current Sales (a) Revised Sales (b) Per Unit $ % of Sales Per Unit $ % of Sales c) Selling Price 180 100% 180 100% d) Variable Expenses -36 20% -86 48% e) Contribution Margin (c-d) 144 80% 94 52% f) Fixed Cost $100,000 g) Current sales (Units) 1,500 h) Increase in sells (Units) 700 i) Total sales after increase (Units) 2,200 Current Statement of Profit Current (j) After new Component (k) Difference (k-j)
(l) m) Sales 270,000 396,000 126,000 (a,c*g) (b,c*i) n) Variable Costs -54,000 -189,200 -135,200 (a,d*g) (b,d*i) o) Contribution (m-n) 216,000 206,800 -9,200 p) Less: Fixed Costs (f) -100,000 -100,000                            -   q) Operating Profits (o-p) 116,000 106,800 -9,200

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