The management of Cerruto Corporation has provided the following data concerning its two products: The constrained resource is a particular machine that is available for 9,600 minutes each month.
-The company is considering launching a new product that would have a variable cost of $117.00 per unit. It would require 6 minutes of the constrained resource. The absolute minimum acceptable selling price for the new product should be:
A) $126.30
B) $172.80
C) $117.00
D) $196.20

Question

The management of Cerruto Corporation has provided the following data concerning its two products:  The constrained resource is a particular machine that is available for 9,600 minutes each month.
-The company is considering launching a new product that would have a variable cost of $117.00 per unit. It would require 6 minutes of the constrained resource. The absolute minimum acceptable selling price for the new product should be:
A) $126.30 
B) $172.80 
C) $117.00 
D) $196.20

Quizplus · Accepted Answer

To determine the minimum acceptable selling price for the new product, we need to calculate the contribution margin per unit, which is the selling price minus the variable cost per unit.

First, we need to calculate how many units of the new product can be produced with the available constrained resource:

9,600 minutes / 6 minutes per unit = 1,600 units

Now, we need to compare the contribution margin per unit of the new product with the contribution margin per unit of the other two products:

Product A: $210.00 - $105.00 = $105.00 
Product B: $178.50 - $63.00 = $115.50

Since the contribution margin per unit of the new product must be at least as high as that of the existing products in order to maintain profitability, we can set up the following equation:

Selling Price - Variable Cost = Constrained Resource Cost / Units Produced

Plugging in the values, we get:

SP - $117.00 = $63.00 / 1,200

SP = $172.80

Therefore, the absolute minimum acceptable selling price for the new product should be $172.80 per unit, which is option B.

The Management of Cerruto Corporation Has Provided the Following Data