Data concerning Lancaster Corporation’s single product appear below:
Per Unit
Percent of sales
Selling price
$204
100%
Variable expenses
62
30%
Contribution margin
$142
70%
Fixed expenses are $107,000 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 $44.
Since the new component would increase the features of the company’s product, the marketing manager
predicts that monthly sales would increase by 420 units. What should be the overall effect on the
company’s monthly net operating income of this change?
decrease of $11,640
increase of $41,160
increase of $11,640
decrease of $41,160
1,200 units
1,620 units
Sales (at $204 per unit)
$244,800
$330,480
Variable expenses (at $62 per unit and $106 per
unit)
74,400
171,720
Contribution margin
170,400
158,760
Fixed expenses
107,000
107,000
Net operating income
$63,400
$51,760
A company has provided the following data:
If the sales volume decreases by 25%, the variable cost per unit increases by 15%, and all other factors
remain the same, net operating income will: (Do not round intermediate calculations.)
decrease by $3,125.
decrease by $15,000.
decrease by $31,875.
increase by $20,625.
1Decrease in sales volume 3,000 units × 75% = 2,250
2Increase in variable expenses $50 × 115% = $57.50
3Decrease in net operating income $35,000 – $3,125 = $31,875
Rothe Company manufactures and sells a single product that it sells for $90 per unit and has a
contribution margin ratio of 35%. The company’s fixed expenses are $49,500. If Rothe desires a monthly
target net operating income equal to 15% of sales, the amount of sales in units will have to be (rounded):
1,100 units
2,750 units
1,571 units
3,667 units
Selling price = $90 per unit
CM ratio = 0.35
Fixed expenses = $49,500
Target profit = 0.15 × Dollar sales
Dollar sales to attain a target profit = (Target profit + Fixed expenses) ÷ CM ratio
Dollar sales = [(0.15 × Dollar sales) + $49,500] ÷ 0.35
0.35 × Dollar sales = (0.15 × Dollar sales) + $49,500
0.20 × Dollar sales = $49,500
Dollar sales = $49,500 ÷ 0.20 = $247,500
Unit sales = Dollar sales ÷ Selling price = $247,500 ÷ $90 per unit = 2,750 units
$14,400
$24,000
$9,600
$16,000