Question

Backus Inc. makes and sells many consumer products. The firm's average contribution margin ratio is 35% Management is considering adding a new product that will require an additional $15,000 per month of fixed expenses and will have variable expenses of $780 per unit. Required: a. Calculate the selling price that will be required for the new product if it is to have a contribution margin ratio equal to 35% b. Calculate the number of units of the new product that would have to be sold if the new product is to increase the firm's monthly operating income by $6,000. (Do not round Intermediate calculations.) per unit a. Selling price b. Number of units

Answer 1

Solution :- (a) Calculation of the selling price of the new product :-

Variable Expenses = $ 7.8 Per Unit

If Contribution Margin Ratio = 35% , Then it means Variable Expenses = 65% (100% - 35%)

Therefore Selling Price = Variable Expenses Per Unit / Variable Expenses in %

= $ 7.8 per unit / 65% = $12 per unit

Thus, If the new product has a contribution margin ratio of 65% , then selling price per unit is $12 per unit.

(b) Calculation of the number of units of the new product to be sold :-

Contribution Margin = Operating Income + Fixed Expenses

Increase in Operating Income = $6000

Add :Additional Fixed Expenses = $15000

Required Contribution Margin = $21000

Contribution Margin Ratio = 35%

Therefore Total Sales = Required Contribution Margin / Contribution Margin Ratio

= $ 21000 / 35% = $60000

Selling price per unit is $12 per unit.

Therefore , No. of units = Total Sales / Selling price per unit

= $ 60000 / $12 per unit = 5000 Units

a	Selling Price	$12 Per Unit
b	Number of Units	5000 Units