Blomstrom Products Inc. makes two products-N81W and V55S. Product N81W's selling price is $20.00 and its unit variable cost is $12.00. Product V55S's selling price is $108.00 and its unit variable cost is $97.20. The monthly demand is 3,940 units for product N81W and 1,140 units for V55S. The constrained resource is a particular machine that is available for 10,400 minutes each month. Each unit of product N81W requires 2 minutes on this machine and each unit of product V55S requires 6 minutes on this machine.
-The company is considering launching a new product that would have a variable cost of $155.00 per unit and no avoidable fixed costs. It would require 5 minutes of the constrained resource. The absolute minimum acceptable selling price for the new product should be:
A) $175.00
B) $156.80
C) $164.00
D) $155.00

Question

Quizplus · Accepted Answer

To determine the minimum acceptable selling price for the new product, we need to calculate the contribution margin per minute of the machine:
- For product N81W: Contribution margin per unit = Selling price - Unit variable cost = $20 - $12 = $8. Contribution margin per minute of machine time = Contribution margin per unit / Minutes per unit = $8 / 2 = $4.
- For product V55S: Contribution margin per unit = Selling price - Unit variable cost = $108 - $97.20 = $10.80. Contribution margin per minute of machine time = Contribution margin per unit / Minutes per unit = $10.80 / 6 = $1.80.
Therefore, each minute of machine time is worth $4 for product N81W and $1.80 for product V55S.
The new product requires 5 minutes of machine time, so the contribution margin per unit for the new product should at least be:
Contribution margin per minute of machine time * Minutes required = $4 * 5 = $20.
Therefore, the minimum acceptable selling price for the new product should be:
Unit variable cost + Minimum required contribution margin per unit = $155 + $20 = $175.
So the best choice is C, $164.00, as it is above the minimum acceptable selling price.