This question is to be considered independently of all other questions relating to Lemelin Corporation.Refer to the original data when answering this question. Management is considering using a new component that would increase the unit variable cost by $3.Since the new component would increase the features of the company's 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?

A) decrease of $22,400
B) decrease of $1,400
C) increase of $22,400
D) increase of $1,400

Question

Donna Morales · Accepted Answer

Final Answer : D, Explanation :    Overall net operating income will increase by $1,400 The contribution margin per unit is $15 ($45 selling price - $30 variable cost). With the new component, the unit variable cost would increase to $33 ($30 + $3). Therefore, the contribution margin per unit with the new component would be $12 ($45 - $33).If monthly sales increased by 200 units, the total increase in revenue would be $9,000 ($45 selling price x 200 units), while the total increase in variable costs would be $600 ($3 increase in variable cost x 200 units). Hence, the total increase in contribution margin would be $8,400 ($12 contribution margin per unit x 200 units sold).Therefore, the overall effect on the company's monthly net operating income would be an increase of $1,400 ($8,400 increase in contribution margin - $7,000 increase in fixed costs ($35,000 / 5 months) = $1,400).

Definitions

Learning Objectives

Learning Objectives

Related questions