Question

Backus Inc. makes and sells many consumer products. The firm’s average contribution margin ratio is 27%. Management is considering adding a new product that will require an additional $13,000 per month of fixed expenses and will have variable expenses of $8 per unit. Required: Calculate the selling price that will be required for the new product if it is to have a contribution margin ratio equal to 27%. (Round your answer to 2 decimal places.) 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 $8,100. (Do not round intermediate calculations.)

Answer 1

The correct answer for option (a) is $10.96 and for option (b) is 7,128 units.

Step-by-step explanation:

According to the scenario, the computation of the given data are as follows:

contribution margin ratio = 27%

Variable expense = $8 per unit

Fixed expense = $13,000

(A) We can calculate the selling price as follows:

Contribution margin ratio = 100 % - Variable expense ratio

= 27% = 100% - Variable expense ratio

= Variable expense ratio = 100% - 27% = 73%

So, Selling price = Variable expense ÷ Variable expense ratio

= $8 ÷ 73%

= $10.96

(b). Profit = $8,100

Contribution margin = Selling price - Variable expense = $10.96 - $8 = $2.96

So. we can calculate the number of units by using following formula:

Number of units required = (Fixed cost + Profit) ÷ Contribution Margin

= ( $13,000 + $8,100 ) ÷ $2.96

= $21,100 ÷ $2.96

= 7,128.38 units