The Flint Fan Corporation is considering the addition of a new model fan, the F-

Question

The Flint Fan 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.

Annual Sales 4000 units Unit Selling Price $58 Unit Variable Costs Production $34 Selling $4 Avoidable Fixed Costs per year Production $20,000 Selling $30,000 Allocated common fixed costs per year $55,000

Explanation / Answer

Solution - To find the CHANGE in net operating income here we need to find the Total Operating Income of F-27 model - After that we need to consider the Loss of contribution margin of other products which will be drop by $7,000 ( Note we can Consider the Drop in Margin while calculating the margin of the New Product itself )

So we have the below details

Now using the above details we will make an Income statement - Note that the Allocated common fixed costs per year above would not be impacted by the addition of the F-27 product therefore we will exclude it completely from our consideration as it is a cost which will be spent in any case

Thus there willbe an INCREASE of $23000 in net operating income if the F-27 product is added next year.

a Annual Sales in Units 4000 b Unit Selling Price 58 Unit Variable Costs c Production 34 d Selling 4 Avoidable Fixed Costs per year e Production 20000 f Selling 30000 g Allocated common fixed costs per year 55000 h Contribution Decrease 7000

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