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11 January, 20:31

Key Company is considering the addition of a new product to its current product lines. The expected cost and revenue data for the new product are as follows: Annual sales ... 2,500 units Selling price per unit ... $304 Variable costs per unit: Production ... $125 Selling ... $49 Avoidable fixed costs per year: Production ... $50,000 Selling ... $75,000 Allocated common corporate costs per year ... $55,000 If the new product is added, the combined contribution margin of the other, existing product lines is expected to drop $65,000 per year. Total common corporate costs would be unaffected by the decision of whether to add the new product. 1. If the new product line is added next year, the increase in net operating income resulting from this decision would be:

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  1. 11 January, 22:24
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    Effect on income = $135,000 increase

    Explanation:

    Giving the following information:

    The expected cost and revenue data for the new product are as follows:

    Annual sales = 2,500 units

    Selling price per unit = $304

    Variable costs per unit:

    Production = $125

    Selling = $49

    Avoidable fixed costs per year:

    Production = $50,000

    Selling = $75,000

    Allocated common corporate costs per year = $55,000

    If the new product is added, the combined contribution margin of the other, existing product lines is expected to drop $65,000 per year. Total common corporate costs would be unaffected by the decision of whether to add the new product.

    Effect on income = (2,500*304) - (2,500 * 174) - 125,000 - 65,000 = $135,000
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