Question4) Wrobbel Corporation produces and sells a single product. Data concern

Question

Question4) Wrobbel Corporation produces and sells a single product. Data concerning that product appear below:

Per Unit

Percent of Sales

Selling price

$150

100%

Variable expenses

    90

   60%

Contribution margin

  $60

   40%

Fixed expenses are $307,000 per month. The company is currently selling 6,000 units per month.

Required:

Management is considering using a new component that would increase the unit variable cost by $2. Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 200 units. What should be the overall effect on the company's monthly net operating income of this change if fixed expenses are unaffected? Show your work!

Per Unit

Percent of Sales

Selling price

$150

100%

Variable expenses

    90

   60%

Contribution margin

  $60

   40%

Explanation / Answer

Solution:

Hence, company's net operating income will decrease by $400 due to the change of component.

Effect on the Company's Net Operating Income if using New Component No change (6000 units) New component is used (6200 units) Net Effect Sales $900,000.00 $930,000.00 $30,000.00 Less: Variable Cost $540,000.00 $570,400.00 $30,400.00 Contribution margin $360,000.00 $359,600.00 -$400.00 Less: Fixed Costs $307,000.00 $307,000.00 $0.00 Net operating Income $53,000.00 $52,600.00 -$400.00

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