The Cabinet Shoppe is considering the addition of a new line of kitchen cabinets

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:

  
If the new cabinets are added, it is expected that the contribution margin of other product lines at the cabinet shop will drop by $23,600 per year.

If the new cabinet product line is added next year, the increase in net operating income resulting from this decision would be:

  Annual sales 6,800 units       Selling price per unit $270       Variable costs per unit:      Production $138          Selling $33       Avoidable fixed costs per year:      Production $46,300          Selling $66,300       Allocated common fixed costs per year $46,800    

Explanation / Answer

If the new cabinet product line is added next year, the increase in net operating income resulting from this decision would be: Ans) Particulars Units Amount Annual Sales 6800 1836000 Variable Cost Per units Production -938400 Selling -224400 Contribution 673200 Avoidable fixed costs per year: Production -46300 Selling -66300 Allocated common fixed costs per year -46800 513800 Contribution reduction for other production -23600 Total Contribution per year 490200 We can accept the product line

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