Key Corporation is considering the addition of a new product. The expected cost
ID: 2535392 • 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.
At what selling price would the new product be just breaking even?
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 = 2500 units
Total Variable Cost = 2500* ($125+$49) = $435,000
Total Avoidable fixed cost = $50000+ $75000 = $125,000
If New product line is added, Total cost expected for the new product = Variable cost + Avoidable fixed cost
= $435000 +$125000 = $560,000
Loss of contribution margin due to new product line = $65,000
Break even selling price = (total cost + contribution loss) / annual sales of new product
= ($560,000 +$65,000) / 2500 = $250
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