Ribb Corporation produces and sells a single product. Data concerning that product appear below: Per Unit Percent of Sales Selling Price $190 100% Variable Expenses 57 30% Contribution Margin $133 70% Fixed expenses are $913,000 per month. The company is currently selling 9,000 units per month. Management is considering using a new component that would increase the unit variable cost by $6. Since the new component would increase the features of the company's product, the marketing manager predicts that monthly sales would increase by 400 units. What should be the overall effect on the company's monthly net operating income of this change?

Decrease in operating income     $3,200  

Explanation:

The computation is shown below:

Particulars  Old method  New method

Sales                 $1,710,000       $1,786,000

                      (9,000 units × $190)    (9,400 units × $190)

Less:

Variable expenses  $513,000           $592,200

                       (9,000 units × $57)    (9,400 units × $63)

Contribution margin $1,197,000       $1,193,800

Less:

Fixed expenses   ($913,000)         ($913,000)

operating income   $284,000          $280,800

Decrease in income     $3,200  

We simply take an difference of operating income under both methods that reflects the decrease in operating income

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