Salley Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $ 200 100 % Variable expenses 40 20 % Contribution margin 160 80 % Fixed expenses are $1,323,000 per month. The company is currently selling 9,380 units per month. Management is considering using a new component that would increase the unit variable cost by $9. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 600 units. What should be the overall effect on the company's monthly net operating income of this change?

The effect on the company's monthly net operating income will be positive for 6,180

Explanation:

The situation we have currently is the following:

Sales are 9,380

Each unit generates a contribution a $160

Total contribution of $1,500,800 (9,380 units x $160)

less Fixed Cost $1,323,000

Operating Income of $177,800

With the new component the data will be

Sales 9,380 + 600 = 9,980

Contribution of 160 - 9 (increase in variable cost) = $151

Total Contribution = $1,506,980‬

less Fixed Cost $1,323,000

Operating Income $183,980‬

Let's compare each operating income:

with the new component $183,980

without the component (current situation) $177,800

Change in net income $6,180

Remember:

if the variable cost increase then the contribution margin decrease the same amount (more money of the sale is used to pay the cost) if their variable cost goes down, then the contribution margin increase (fewer sales revenues go for the cost of the unit and more is left for the rest of the expenses)