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

To determine the minimum acceptable selling price, we need to calculate the contribution margin per unit, which is the selling price minus the variable cost per unit.
Since the product has no avoidable fixed costs, all of the contribution margin goes towards covering the constrained resource (which is 16 minutes in this case).

To calculate the contribution margin per minute of the constrained resource, we divide the contribution margin per unit by the amount of the constrained resource used per unit:

Contribution margin per unit = Selling price - Variable cost per unit
= SP - $134.00

Constrained resource used per unit = 16 minutes

Contribution margin per minute of the constrained resource = (SP - $134.00) / 16

We want to find the absolute minimum acceptable selling price, so we need to set the contribution margin per minute of the constrained resource equal to zero and solve for the selling price:

(SP - $134.00) / 16 = 0
SP - $134.00 = 0
SP = $134.00

Since a selling price of $134.00 would result in zero contribution margin per minute of the constrained resource, the absolute minimum acceptable selling price would have to be greater than $134.00. The only option that satisfies this condition is A) $175.60.

The Company Is Considering Launching a New Product That Would