Key Corporation is considering the addition of a new product. The expected cost
ID: 2535369 • Letter: K
Question
Key Corporation is considering the addition of a new product. The expected cost and revenue data for the new product are as follows:
If the new product is added, the combined contribution margin of the other, existing products is expected to drop $65,000 per year. Total common fixed corporate costs would be unaffected by the decision of whether to add the new product.
If the new product is added next year, the financial advantage (disadvantage) resulting from this decision would be:
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 fixed corporate costs per year $ 55,000Explanation / Answer
Solution :
Annual sales of new product = 2500 units
Sales Revenue = 2500* $304 = $760,000
Total cost for the new product = Variable Costs +Avoidable Fixed Cost = 2500* ($125+$49) + $50,000 +$75,000 = $560,000.
Income from new product = Sales Revenue - total costs = $760,000 - $560,000 = $200,000
Contribution loss for other existing product = $65,000
Threfore, net financial advantage from new product line = $200,000 - $65,000 = $135,000
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