The Western 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:$\begin{array}{|r|r|}
\hline \text { Annual Sales } & 3,000 \text { Units } \
\hline \text { Selling Price per Unit } & \$ 309 \
\hline \text { Variable Costs (Per Unit) } & \$ 130 \
\hline \text { Production } & \$ 50 \
\hline \text { Selling } & \
\hline \text { Avoidable Fixed Costs per Year: } & \$ 51,000 \
\hline \text { Production } & \$ 75,000 \
\hline \text { Selling } & \
\hline \text { Unavoidable Allocated Fixed Corporate } & \$ 54,000 \
\hline \text { Costs per Year } & \
\hline
\end{array}$If the new product is added to the existing product line, then sales of existing products will decline. Therefore, the contribution margin of the other existing product lines is expected to drop $78,000 per year.

-If the new product is added next year,what will be the increase in operating income resulting from this decision?
A) $183,000.
B) $207,000.
C) $261,000.
D) $387,000.

Question

The Western 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:$\begin{array}{|r|r|}
\hline \text { Annual Sales } & 3,000 \text { Units } \
\hline \text { Selling Price per Unit } & \$ 309 \
\hline \text { Variable Costs (Per Unit) } & \$ 130 \
\hline \text { Production } & \$ 50 \
\hline \text { Selling } & \
\hline \text { Avoidable Fixed Costs per Year: } & \$ 51,000 \
\hline \text { Production } & \$ 75,000 \
\hline \text { Selling } & \
\hline \text { Unavoidable Allocated Fixed Corporate } & \$ 54,000 \
\hline \text { Costs per Year } & \
\hline
\end{array}$If the new product is added to the existing product line, then sales of existing products will decline. Therefore, the contribution margin of the other existing product lines is expected to drop $78,000 per year.

-If the new product is added next year,what will be the increase in operating income resulting from this decision?
A) $183,000.
B) $207,000.
C) $261,000.
D) $387,000.

Quizplus · Accepted Answer

To calculate the increase in operating income resulting from the addition of the new product, we need to consider the additional revenue, the variable costs, the avoidable fixed costs, and the impact on the contribution margin of other products.1. **Revenue from New Product**: 3,000 units * $309/unit = $927,0002. **Variable Costs**: 3,000 units * $130/unit = $390,0003. **Avoidable Fixed Costs**: $51,000 (Production) + $75,000 (Selling) = $126,0004. **Decrease in Contribution Margin from Existing Products**: $78,000The increase in operating income can be calculated as follows:$$ \text{Increase in Operating Income} = \text{Revenue} - \text{Variable Costs} - \text{Avoidable Fixed Costs} - \text{Decrease in Contribution Margin} $$$$ \text{Increase in Operating Income} = \$927,000 - \$390,000 - \$126,000 - \$78,000 = \$333,000 $$However, the unavoidable allocated fixed corporate costs of $54,000 per year are not relevant to this decision since they would remain the same whether the new product is added or not. Therefore, they should not be subtracted from the operating income increase.Thus, the correct calculation does not subtract the $54,000, leading to the final increase in operating income being:$$ \$333,000 - \$0 = \$333,000 $$It seems there was a mistake in my calculation. Let's correct that:The correct calculation should consider the net profit from the new product and the decrease in contribution margin from existing products:1. **Net Profit from New Product**: Revenue - Variable Costs - Avoidable Fixed Costs   - Revenue from New Product: 3,000 units * $309 = $927,000   - Total Variable Costs: 3,000 units * $130 = $390,000   - Avoidable Fixed Costs: $51,000 + $75,000 = $126,000   - Net Profit from New Product: $927,000 - $390,000 - $126,000 = $411,0002. **Decrease in Contribution Margin from Existing Products**: $78,0003. **Increase in Operating Income**: Net Profit from New Product - Decrease in Contribution Margin   - Increase in Operating Income: $411,000 - $78,000 = $333,000Given the options provided and the corrected calculation, it appears there was an error in my initial explanation and calculation. The correct answer should reflect the net increase in operating income after considering all relevant costs and impacts. Given the options and the mistake in the calculation process, none of the provided choices (A, B, C, D) directly match the corrected outcome. The correct approach to find the increase in operating income involves subtracting the decrease in contribution margin from the net profit of the new product, but it seems there was a misunderstanding in applying the figures to the provided options.

The Western Company Is Considering the Addition of a New