Reference: 09-08
The Western 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: $$\begin{array} { | l | l | l | }
\hline \text { Annual sales } & 3,000 & \text { units } \
\hline \text { Selling price per unit } & \$ 309 & \
\hline \text { Variable costs per unit: } & & \
\hline \text { Production } & \$ 130 & \
\hline \text { Selling } & \$ 50 & \
\hline \text { Avoidable fixed costs per year: } & & \
\hline \text { Production } & \$ 51,000 & \
\hline \text { Selling } & \$ 75,000 & \
\hline \text { Unavoidable allocated fixed corporate costs per year } & \$ 54,000 & \
\hline
\end{array}$$ If the new product is added to the existing product line, then sales of existing products will decline. As a consequence, the contribution margin of the other existing product lines is expected to drop $78,000 per year.
-What is the lowest selling price per unit among those listed below that could be charged for the new product and still make it economically desirable to add the new product?
A)$222.
B)$291.
C)$249.
D)$240.

Question

Reference: 09-08
The Western 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: $$\begin{array} { | l | l | l | } 
\hline \text { Annual sales } & 3,000 & \text { units } \
\hline \text { Selling price per unit } & \$ 309 & \
\hline \text { Variable costs per unit: } & & \
\hline \text { Production } & \$ 130 & \
\hline \text { Selling } & \$ 50 & \
\hline \text { Avoidable fixed costs per year: } & & \
\hline \text { Production } & \$ 51,000 & \
\hline \text { Selling } & \$ 75,000 & \
\hline \text { Unavoidable allocated fixed corporate costs per year } & \$ 54,000 & \
\hline
\end{array}$$ If the new product is added to the existing product line, then sales of existing products will decline. As a consequence, the contribution margin of the other existing product lines is expected to drop $78,000 per year.
-What is the lowest selling price per unit among those listed below that could be charged for the new product and still make it economically desirable to add the new product?
A)$222.
B)$291.
C)$249.
D)$240.

Quizplus · Accepted Answer

To determine the lowest selling price per unit that makes the new product economically desirable, calculate the total contribution margin needed to cover the avoidable fixed costs and the lost contribution margin from existing products. The total avoidable fixed costs are $126,000 ($51,000 + $75,000), and the lost contribution margin is $78,000, totaling $204,000. The contribution margin per unit must be at least $68 ($204,000 / 3,000 units). The variable costs per unit are $180 ($130 + $50), so the selling price must be at least $248 ($180 + $68). Therefore, the lowest selling price among the options is $249.

Reference: 09-08 the Western Company Is Considering the Addition of a New

Reference: 09-08
the Western Company Is Considering the Addition of a New