Question

Bates Company plans to add a new item to its line of consumer product offerings. Two possible products are under consideration. Each unit of Product A costs $6 to produce and has a contribution margin of $3, while each unit of Product B costs $12 and has a contribution margin of $4. What is the differential revenue for this decision

Answer 1

$7 is the differential revenue for this decision

Step-by-step explanation:

In this question, we are asked to calculate the differential revenue for a decision taken by a company. We proceed as follows;

The term differential revenue refers to the difference is sales which is generated by taking 2 different action courses. Take for example, there are 2 approaches a company needs to take to increase sales, the differential revenue is that sales difference we have when we subtract the sales from the two different actions taken.

In this question, we can identify that we have two products A and B under consideration. To appropriately calculate the differential revenue, we add cost of unit product in each of the cases to the contribution margin, then subtract the total of A from B.

Hence the differential revenue is as follows;

(12+4) - (6+3) = 16 -9 = $7