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: 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

Operating Income from F - 27 Annual Sales 4000 Unit Sales Price 58 Unit Variable Cost 38 Contribution 20 80000 Less Avoidable Fixed Cost -50000 Operating Income 30000 Operating Income of F- 27 30000 Decrease in contribution margin of existing product -7000 Increase in Net operating Income 23000

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