Meyers Corp. has annual revenues of $450,000, an average contribution margin rat
ID: 2348130 • Letter: M
Question
Meyers Corp. has annual revenues of $450,000, an average contribution margin ratio of 35%, and fixed expenses of $175,000.
Management is considering adding a new product to the company's product line. The new item will have $9.75 of variable costs per unit. Calculate the selling price that will be required if this product is not to affect the average contribution margin ratio. (Omit the "$" sign in your response.)
If the new product adds an additional $37,800 to Meyers's fixed expenses, how many units of the new product must be sold at the price calculated in requirement a to break even on the new product? (Do not round your intermediate calculations.)
If 15,000 units of the new product could be sold at a price of $16.00 per unit, and the company's other business did not change, calculate Meyers's total operating income and average contribution margin ratio. (Do not round your intermediate calculations. Round your answers to 2 decimal places. Omit the "$" and "%" signs in your response.)
Required: (a)Management is considering adding a new product to the company's product line. The new item will have $9.75 of variable costs per unit. Calculate the selling price that will be required if this product is not to affect the average contribution margin ratio. (Omit the "$" sign in your response.)
Explanation / Answer
Revenue = $450,000
Contribution = 450,000 x 0.35 = $157,500
Variable costs = 450000 - 157500 = $292,500
(a)
According to the contribution margin ratio of 35%, variable costs represents 65% of sales revenue.
Thus, when variable cost increase by $9.75, the selling price result in no change of contribution margin ratio will be 9.75 x 100/65 = $15
(b)
Additional Fixed Cost = $37,800
Selling Price = $15, Variable Cost = $9.75
Contribution margin per unit = 15 - 9.75 = $5.25
Breakeven units = 37800/5.25 = 7,200 units
(c)
New Sales Revenue = 450000 + 15000 x 16 = $690000
New Variable costs = $292500 + 15000 x 9.75 = $438750
New Contribution = 690000 – 438750 = $251,250
Operating Income = 251250 – (175000 + 37800) = $38450
Contribution margin ratio = 251250/690000 = 36.41%
Hope this helps!