Wrobbel Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling price $ 210 100 % Variable expenses 42 20 % Contribution margin $ 168 80 % Fixed expenses are $130,000 per month. The company is currently selling 1,200 units per month.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Wrobbel Corporation produces and sells a single product. Data concerning that product appear below:
| Per Unit | Percent of Sales | ||||||
| Selling price | $ | 210 | 100 | % | |||
| Variable expenses | 42 | 20 | % | ||||
| Contribution margin | $ | 168 | 80 | % | |||
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Fixed expenses are $130,000 per month. The company is currently selling 1,200 units per month.
Management is considering using a new component that would increase the unit variable cost by $48. Since the new component would improve the company's product, the marketing manager predicts that monthly sales would increase by 400 units.
Required:
What should be the overall effect on the company's monthly net operating income of this change if fixed expenses are unaffected?
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