The Cabinet Shoppe is considering the addition of a new line of kitchen cabinets
ID: 2435724 • Letter: T
Question
The Cabinet Shoppe is considering the addition of a new line of kitchen cabinets to its current product lines. Expected cost and revenue data for the new cabinets are as follows:* Annual sales = 5,000 units
* Selling price per unit = $180
Variable costs per unit:
* Production = $120
* Selling = $15
Avoidable fixed costs per year:
* Production = $40,000
* Selling = $60,000
* Allocated common fixed costs per year = $45,000
If the new cabinets are added, it is expected that the contribution margin of other product lines at the cabinet shop will drop by $20,000 per year.
What is the lowest selling price per unit that could be charged for the new cabinets and still make it economically desirable to add the new product line?
1) $159.
2) $164.
3) $171.
4) $151.
show work pleas
Explanation / Answer
The fixed costs associated with producing the new cabinets are $40,000. So if we allocated this among 5000 units (45000/5000) we get $8 per unit in additional costs. The variable costs are $135. Add the $8 and you get $143 per unit. The fixed costs associated with selling the new cabinets are $60,000 so if we allocate that amongst 5000 units we get another $12 to add on giving us $155. Now, the contribution margin for other products will drop by $20,000 so lets allocate that amongst our 5000 units to get and additional $4 per unit (20000/5000). Add that on to our $155 in costs to get $159 per unit. The allocated common fixed costs are not incremental and are therefore considered to be irrelevant costs. They are the costs associated with doing business (even if they do not make the new cabinets, they will have to pay for the common fixed costs). Therefore, in order for the new cabinets to make zero profit they must be sold for at least $159 (zero profit is still economically desirable because everyone that is making them is still getting paid and such). Please remember to rate.