Question

Assume a company is considering adding a new product line with the following estimated cost and revenue data: Annual sales 6,000 units Selling price per unit $ 180 Variable manufacturing costs per unit $ 140 Variable selling costs per unit $ 15 Incremental fixed manufacturing costs $ 65,000 per year Incremental fixed selling costs $ 40,000 per year Allocated common fixed administrative costs $ 45,000 per year If the new product line is added, the company expects that it will increase the sales of complementary products, thereby generating $31,000 in incremental contribution margin from those products. What is the financial advantage (disadvantage) of adding the new product line

Answer 1

Answer:

Financial advantage of   $76,000

Explanation :

Concentrate on the incremental revenues (including incremental savings) and incremental costs (including opportunity cost) of adding the new product line.

Analysis of the addition of a new product line

Sales and Savings :

Sales (6,000 units × $ 180)                                                        $1,080,000

Sales of complementary products                                                 $31,000

Costs and Opportunity Costs :

Variable manufacturing costs per unit ($140 × 6,000 units)     (840,000)

Variable selling costs per unit ($15 × 6,000 units)                     ($90,000)

Incremental fixed manufacturing costs                                     ($ 65,000)

Incremental fixed selling costs                                                  ($ 40,000)

Financial advantage (disadvantage)                                            $76,000