Problem:
Greenville Corporation is considering the addition of a new product to its current product lines. The expected cost and revenue data for the new product are as follows:
Annual sales 3,000 unts
Selling price per unit $309
Variable costs per unit:
Production $130
Selling $50
Avoidable fixed costs per year:
Production $51,000
Selling $75,000
Unavoidable allocated fixed corporate costs per year: $54,000
If the new product is added to the existing product line, then sales of existing products will decline. As a consequence, the contribution margin of the other existing product lines is expected to drop $78,000 per year.
Q1. If the new product is added next year, the increase in net operating income resulting from this decision would be:
Q2. What is the lowest selling price per unit that could be charged for the new product and still make it economically desirable to add the new product?