Key Company is considering the addition of a new product to its current product
ID: 2509512 • Letter: K
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.
What is the lowest selling price per unit that could be charged for the new product line and still make it economically desirable to add the new product line?
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
Explanation / Answer
Variable costs = Production + Selling
= (2,500*125) + (2,500*49)
= 312,500 + 122,500
= 435,000
Avoidable fixed costs = Production + Selling
= 50,000 + 75,000
= 125,000
Contribution margin lost from adding the new product line = 65,000
Relavent costs = Variable costs + Avoidable fixed cotsts + Contribution margin lost
= 435,000 + 125,000 + 65,000
= 625,000
Relavent cost per unit = 625,000 / 2,500 units
= 250
Lowest selling price = 250
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