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Flanders Manufacturing is considering purchasing a new machine that will reduce unit variable costs by $0.15. The new machine will increase annual fixed costs by $18,250. Before purchasing the new machine, sales volume is 216,000 units, the unit selling price is $2.15, the unit variable cost is $1.75, and total fixed costs are $56,000. What will be the impact on net operating income if Flanders purchases the new machine

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Answer:

Effect on income= $14,150 increase

Explanation:

Giving the following information:

Unitary variable cost reduction= $0.15

Increase in fixed cost= $18,250

Before purchasing the new machine, sales volume is 216,000 units.

To calculate the effect on income, we need to determine the total decrease in variable cost:

Total decrease in variable cost= 0.15*216,000= $32,400

Now, the effect on income:

Effect on income= 32,400 - 18,250

Effect on income= $14,150 increase

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