Whelchel Products Inc.makes two products-K12C and R25O.Product K12C's selling price is $56.00 and its unit variable cost is $33.60.Product R25O's selling price is $195.00 and its unit variable cost is $156.00.The monthly demand is 980 units for product K12C and 500 units for R25O.The constrained resource is a particular machine that is available for 10, 100 minutes each month.Each unit of product K12C requires 7 minutes on this machine and each unit of product R25O requires 15 minutes on this machine. The company is considering launching a new product that would have a variable cost of $134.00 per unit and no avoidable fixed costs.It would require 16 minutes of the constrained resource.The absolute minimum acceptable selling price for the new product should be:
A)$175.60
B)$185.20
C)$136.60
D)$134.00

Question

Quizplus · Accepted Answer

First, calculate the contribution margin per unit for each product:
- Product K12C: $56.00 - $33.60 = $22.40
- Product R25O: $195.00 - $156.00 = $39.00

Next, calculate the contribution margin per constrained minute for each product:
- Product K12C: $22.40 / 7 minutes = $3.20 per minute
- Product R25O: $39.00 / 15 minutes = $2.60 per minute

Since the company has 10,100 constrained minutes, it can produce:
- Product K12C: 980 units x 7 minutes per unit = 6,860 minutes
- Product R25O: 500 units x 15 minutes per unit = 7,500 minutes

Therefore, the total contribution margin for the two products would be:
- Product K12C: 6,860 minutes x $3.20 per minute = $21,952
- Product R25O: 7,500 minutes x $2.60 per minute = $19,500

Combined, the total contribution margin is $41,452.

Assuming the company uses all 10,100 minutes on the two existing products, it would not have any constrained minutes left for the new product.

However, if the company were to allocate some of the constrained minutes to the new product, it would need to ensure that the contribution margin per constrained minute for the new product is at least $3.20 for it to be as profitable as Product K12C.

To achieve this, the minimum selling price for the new product can be calculated as follows:
- Variable cost per unit: $134.00
- Contribution margin per unit: $134.00 - $0.00 (no fixed costs) = $134.00
- Contribution margin per minute: $134.00 / 16 minutes = $8.38 per minute
- Minimum selling price: $8.38 per minute / $3.20 per minute = $175.60

Therefore, the company would need to sell the new product for at least $175.60 per unit to be as profitable as Product K12C. Option A is the correct answer.