Question

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:

Answer 1

Answer:

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