Question

D&R Corp. has annual revenues of $284,000, an average contribution margin ratio of 34%, and fixed expenses of $113,200. Required: a. Management is considering adding a new product to the company's product line. The new item will have $8.3 of variable costs per unit. Calculate the selling price that will be required if this product is not to affect the average contribution margin ratio. b. If the new product adds an additional $31100 to D&R's fixed expenses, how many units of the new product must be sold at the price calculated in part a to break even on the new product? c. If 20,700 units of the new product could be sold at a price of $14.2 per unit, and the company's other business did not change, calculate D&R's total operating income and average contribution margin ratio Complete this question by entering your answers in the tabs below. Required A Required B Required c Management is considering adding a new product to the company's product line. The new item will have $8.30 of variable costs per unit. Calculate the selling price that will be required if this product is not to affect the average contribution margin ratio. (Round your answer to 2 decimal places.) Selling price per unit Required B)

Answer 1

Values given in the example

Annual Revenues 2,84,000$

Average contribution margin ratio -34%

Fixed Expenses 1,13,200$

1) Calculation of selling price per unit

Variable cost per unit =8.3$ is given in the example

In order to find the selling price per unit we require no of units sold so we can calculate the same by the following

Total Contribution = Total Revenues ×Average contribution margin ratio

=284000$×34%= 96560$

Total Variable cost = Total Revenues-Total Contribution

=284000$-96560$= 187440$

Total Variable Cost =no of units sold ×variable cost per unit

Hence no of units sold=Total Variable Cost /variable cost per unit

=1,87,440$/8.3$= 22,583 units

Now we can calculate the selling price per unit

Selling price per unit =Total Revenues/No of units sold

=284000$/22583units= 12.58$

2) If fixed cost is 31100$ then the no of units to be sold to achieve break even is as follows:

Break even point in units= Total Fixed cost/Contribution per unit(selling price per unit -variable cost per unit=12.58-8.3=4.28)

=31100$/4.28= 7266.36 units

Let's verify If break even is achieved

Revenues(7266.36×12.58)=    91411$

Less: Variable Cost (7266.36×8.3)=60311$

Contribution (91411$-60311$) =31100

Less Fixed Cost =31100

Operating profit nil

3) Calculation of operating income and average contribution margin if 20,700 units are sold at 14.20$per unit.

Total Revenues(20,700 units×14.20$ per unit) =2,93,940

Less Variable Cost (20,700units× 8.3$) =1,71,810$

Contribution (2,93,940$-171810$)    = 1,22,130

Less Fixed Costs =1,13,200$

Operating Income    =8930$

Average contribution ratio=Total Contribution/Total Revenues ×100= 1,22,130$/2,93,940$×100=41.55 rounding off to 42%.

Answer 2

For section 3 - be sure to include the existing reveue and expence PLUS the new product revenue, expenses, etc.