Naumann Corporation produces and sells a single product. Data concerning that product appear below: Per UnitPercent of SalesSelling price$100 100%Variable expenses 30 30%Contribution margin$70 70% Fixed expenses are $234,000 per month. The company is currently selling 4,000 units per month. Required:Management is considering using a new component that would increase the unit variable cost by $7. Since the new component would improve 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 if fixed expenses are unaffected?
What will be an ideal response?
| New variable cost per unit ($30 per unit + $7 per unit) | $ | 37 | |
| New contribution margin per unit ($100 per unit - $37 per unit) | $ | 63 | |
| New unit monthly sales (4,000 units + 500 units) | 4,500 | ||
| New total contribution margin: 4,500 units × $63 per unit | $ | 283,500 | |
| Current total contribution margin: 4,000 units × $70 per unit | 280,000 | ||
| Change in total contribution margin and in net operating income | $ | 3,500 |
Because fixed expenses are not affected by this change, the change in net operating income will be equal to the change in total contribution margin.
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