2. Dillon Corp. manufactures and sells coffee makers . Data concerning their mid

Question

2. Dillon Corp. manufactures and sells coffee makers.

Data concerning their mid-range coffee maker. 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 part in the coffee maker that would increase the unit variable cost by $2. Since the new part would improve the 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.

Explanation / Answer

In present Scenario:

Net operation income = Total revenue – variable expenses – fixed expenses

No. of units sold per month = 6000

Unit selling price = $150

Unit variable expense = $90

Fixed cost = $307,000 per month

Net operation income =6000*150 – 6000*90 - 307000

Net operation income = $53000

In new scenario (when new part is added):

No. of units sold per month = 6000 + 200=6200

Unit selling price = $150

Unit variable expense = $92

Fixed cost = $307,000 per month

New net monthly operating income = 6200*150 – 6200*92 – 307000

New net monthly operating income =$52600

Change in net monthly operating income = 52600-53000= - $400

Thus, new net monthly operating income will come down by $400.

% change in net monthly operating income = -400/53000= -.75%

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