Thornbrough Corporation produces and sells a single product with the following c

Question

Thornbrough Corporation produces and sells a single product with the following characteristics: Percent of Per Unit $220 Sales Selling price Variable expenses Contribution margin 100? 20? 80? 02:28:02 $176 The company is currently selling 7,000 units per month. Fixed expenses are $901,000 per month Management is considering using a new component that would increase the unit vart by $11. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 500 units. What should be the overall effect on the company's monthly net operating income of this change? Multiple Choice increase of $82.500 decrease of $5,500 decrease of $82,500 increase of $5,500

Explanation / Answer

Option (D) is correct

Current plan:

Sales (7000 units) = 7000*$220= $1540000

Variable expenses = 7000*$44= $308000

Contribution margin = 7000*176= $1232000

Net operating income = Contribution margin - Fixed costs = $1232000 - $901000 = $331000

Under the changed plan:

Sales (7500 units) = 7500*$220 = $1650000

Variable expenses will increase by $11, new variable expenses are $44+ $11 = $55 per unit

Total Variable expenses = 7500*$55 = $412500

Contribution margin = Sales - Variable cost = $1650000 - $412500 = $1237500

Fixed costs will remain same

Net operating income = Contribution margin - Fixed costs = $1237500 - $901000 = $336500

Net change under the plans = New operating income - Old operating income = $336500 -$331000 = $5500 increase

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