Alden Corporation Produces and Sells a Single Product Fixed Costs Are $110,000 Per Month

question 94

Essay

Alden Corporation produces and sells a single product.Data concerning that product appear below:
$$\begin{array} { | l | r | r | } \hline & \text { Per Uni } & \text { Percent of Sales } \\\hline \text { Selling price } & \$ 190 & 100 \% \\\hline \text { Variable costs } &\underline{ 38} &\underline{ 20 \%} \\\hline \text { Contribution margin } & \$ 152 & 80 \% \\\hline\end{array}$$
Fixed costs are $110,000 per month.The company is currently selling 1,000 units per month.
Required:
Management is considering using a new component that would increase the variable cost per unit by $56.Since the new component would improve the company's product,the marketing manager predicts that monthly sales would increase by 500 units.What should be the overall effect on the company's monthly operating profit of this change if fixed costs are unaffected?

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Definitions:

Price Ceiling

A legal maximum price that can be charged for a good or service, usually imposed by a government to prevent prices from becoming too high.

Crude Oil

An organic, unprocessed substance found in nature, made up of hydrocarbon deposits along with other organic matter, known as crude oil.

OPEC

The Organization of Petroleum Exporting Countries, an intergovernmental body aiming to coordinate and unify petroleum policies among member countries.

Tax

A required fiscal imposition or alternative form of charge levied on taxpayers by a governmental institution for the purpose of funding government activities and assorted public expenses.