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:

If the new product is added to the existing product line, then sales of existing products will decline. Therefore, the contribution margin of the other existing product lines is expected to drop $78,000 per year.

-Which lowest selling price per unit could be charged for the new product that would still make it economically desirable to add the new product?
A) $222.
B) $240.
C) $249.
D) $291.

Question

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:

If the new product is added to the existing product line, then sales of existing products will decline. Therefore, the contribution margin of the other existing product lines is expected to drop $78,000 per year.

-Which lowest selling price per unit could be charged for the new product that would still make it economically desirable to add the new product?
A) $222. 
B) $240. 
C) $249. 
D) $291.

Quizplus · Accepted Answer

We can use the formula for calculating the contribution margin ratio (CMR) to find the minimum selling price per unit:

CMR = (contribution margin per unit / selling price per unit) x 100

We can set up an equation to find the required CMR to cover the $78,000 drop in contribution margin from existing products:

CMR of existing products - CMR of new product = (reduction in contribution margin) / total sales

Plugging in the numbers:

48% - (22.5 / SP) x 100 = 78000 / 1,800,000

We can then solve for SP:

SP = $249. Therefore, the lowest selling price per unit that would still make it economically desirable to add the new product is $249.

The Western Company Is Considering the Addition of a New