Gorey Products Inc. makes two products—K36L and W81H. Product K36L's selling price is $345.00 and its unit variable cost is $310.50. Product W81H's selling price is $256.00 and its unit variable cost is $230.40. The monthly demand is 430 units for product K36L and 890 units for W81H. The constrained resource is a particular machine that is available for 10,000 minutes each month. Each unit of product K36L requires 15 minutes on this machine and each unit of product W81H requires 8 minutes on this machine.
-The company is considering launching a new product that would have a variable cost of $158.00 per unit and no avoidable fixed costs.It would require 9 minutes of the constrained resource.The absolute minimum acceptable selling price for the new product should be:
A)$178.70
B)$158.00
C)$160.30
D)$186.80

Question

Quizplus · Accepted Answer

The minimum acceptable selling price should cover the variable cost and the opportunity cost of using the constrained resource. The opportunity cost is calculated as the contribution margin per minute of the constrained resource from the best alternative use. Assuming the best alternative use has a contribution margin of $2.30 per minute, the minimum price would be $158.00 + (9 minutes * $2.30) = $178.70.