Question

Backus Inc. makes and sells many consumer products. The firm’s average contribution margin ratio is 26%. Management is considering adding a new product that will require an additional $12,000 per month of fixed expenses and will have variable expenses of $9 per unit.Required:a. Calculate the selling price that will be required for the new product if it is to have a contribution margin ratio equal to 25%. (Round your answer to 2 decimal places.)b. Calculate the number of units of the new product that would have to be sold if the new product is to increase the firm's monthly operating income by $7,500. (Do not round intermediate calculations.)

Answer 1

Answer and Explanation:

a. The computation of the selling price is given below:

= $9 ÷ (1 - 0.25)

= $12 per unit

b. The number of units that should be sold in the case when the operating income is increased by $7,500

= ($12,000 + $7,500) ÷ ($12 - $9)

= 6,500 units

Hence, the same should be considered and relevant