Kramer Company is considering adding a new line of kitchen cabinets which would result in 800 units of sales at a selling price of per year of $3,500 per unit. Data concerning the unit production costs of the cabinets follow: Variable manufacturing costs per unit $1,500 Variable selling costs per unit $350 Incremental fixed costs per year: Manufacturing $475,400 Selling $55,000 Allocated Common Costs per year: Manufacturing $80,000 Selling and Administrative $112,000 If the kitchen cabinets are added as a new product line, the company expects that the contribution margin earned from selling its other products will decrease by $200,000 per year. 1. What is the annual financial advantage (disadvantage) of adding the new line of kitchen cabinets? Fully support your answer with appropriate calculations. 2. What is the lowest selling price per unit that could be charged for the cabinets and still make it economically desirable for the company to add the new product line?
Kramer Company is considering adding a new line of kitchen cabinets which would result in 800 units of sales at a selling price of per year of $3,500 per unit. Data concerning the unit production costs of the cabinets follow:
Variable
Variable selling costs per unit $350
Incremental fixed costs per year:
Manufacturing $475,400
Selling $55,000
Allocated Common Costs per year:
Manufacturing $80,000
Selling and Administrative $112,000
If the kitchen cabinets are added as a new product line, the company expects that the contribution margin earned from selling its other products will decrease by $200,000 per year.
1. What is the annual financial advantage (disadvantage) of adding the new line of kitchen cabinets? Fully support your answer with appropriate calculations.
2. What is the lowest selling price per unit that could be charged for the cabinets and still make it economically desirable for the company to add the new product line?
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