Question

D&R Corp. has annual revenues of $269,000, an average contribution margin ratio of 32%, and fixed expenses of $112,400.

Required:

Management is considering adding a new product to the company's product line. The new item will have $9 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.If the new product adds an additional $32,900 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? If 20,100 units of the new product could be sold at a price of $13.8 per unit, and the company's other business did not change, calculate D&R's total operating income and average contribution margin ratio. Management is considering adding a new product to the company's product line. The new item will have $9.00 of variable costs per unit.

1. Calculate the selling price that will be required if this product is not to affect the average contribution margin ratio.    Selling Price

2. If the new product adds an additional $32,900 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?

Break-even in units

3. If 20,100 units of the new product could be sold at a price of $13.80 per unit, and the company's other business did not change, calculate D&R's total operating income and average contribution margin ratio.

Total operating income

Average contribution margin ratio

Answer 1

Answer:

1)

Selling Price   =   Variable Cost / Variable Cost ratio                             =    $9 / 68%                             = $13.24 Variable Cost ratio   =   100 (-) Contribution Margin ratio                                         =   100 (-) 32%                                         =    68%

Selling Price = $13.24

2)

Contribution margin per unit = Selling price (-) variable cost                                                             = $13.24 (-) $9                                                             = $4.24

Breakeven units   = Fixed Cost / Contribution margin per unit                                     =   $32,900 / $4.24                                     = 7,759 units

Breakeven units   = 7,759 units

3)

New Sales Revenue = $269,000 + (20,100 x $13.80)                                          = $269,000 + $277,380                                          = $546,380 New Variable costs =( $269,000 x 68%) + (20,100 x $9)                                          = $182,920 + $180,900                                          = $363,820 New Contribution =   $546,380 – $363,820                                        =    $182,560 Operating Income =   New Contribution   (-) Fixed Costs                                        = $182,560 – (112,400 + $32,900 )                                        = $37,260 Contribution margin ratio = New Contribution    / New Sales Revenue                                                        = $182,560 /$546,380                                                        = 33.41%