Nordic Avionics makes aircraft instrumentation. Their basic navigation radio requires $80 in variable costs and requires $2,000 per month in fixed costs. Nordic sells 30 radios per month. If they process the radio further to enhance its functionality, it will require an additional $25 per unit of variable costs, plus an increase in fixed costs of $800 per month. The current price of the radio is $260. The CEO wishes to improve operating income by $1,000 per month by selling the enhanced version of the radio. In order to hit his target, the price to be charged for the enhanced product is:

Question

Quizplus · Accepted Answer

First, we need to calculate the current contribution margin of the basic navigation radio:

Contribution margin per unit = Selling price per unit - Variable costs per unit
Contribution margin per unit = $260 - $80
Contribution margin per unit = $180

Total contribution margin = Contribution margin per unit x Units sold
Total contribution margin = $180 x 30
Total contribution margin = $5,400

Now let's calculate the contribution margin of the enhanced version:

Total fixed costs = Current fixed costs + Additional fixed costs
Total fixed costs = $2,000 + $800
Total fixed costs = $2,800

Variable costs per unit = Current variable costs + Additional variable costs
Variable costs per unit = $80 + $25
Variable costs per unit = $105

Contribution margin per unit = Selling price per unit - Variable costs per unit
Contribution margin per unit = $x - $105 (unknown)

Contribution margin per unit needs to be calculated so that the total contribution margin is $6,400 ($5,400 current contribution margin + $1,000 desired increase):

Contribution margin per unit x Units sold = Total contribution margin
$x - $105 x 30 = $6,400
$x - $3,150 = $6,400
$x = $9,550

Therefore, the price to be charged for the enhanced product is:
Price = Contribution margin per unit + Variable costs per unit
Price = $9,550 + $105
Price = $9,655

However, this price is not possible according to the answer choices. The closest option is B, which is $345 per unit. This price gives a contribution margin per unit of $245, which multiplied by the 30 units sold gives a total contribution margin of $7,350, meeting the CEO's target of $6,400.

Nordic Avionics Makes Aircraft Instrumentation