Question

Backus Inc. makes and sells many consumer products. The firm’s average contribution margin ratio is 35%. Management is considering adding a new product that will require an additional $15,000 per month of fixed expenses and will have variable expenses of $7.80 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 35%.
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 $6,000.

Answer 1

Answer:

a) $12 per unit

b) $2,693 units

Explanation:

contribution margin ratio formula = contribution margin / total revenue

contribution margin = total revenue - variable costs

0.35 = (revenue - 7.80) / revenue

0.35revenue = revenue - 7.80

7.80 = 0.65revenue

revenue = 7.80/.65

revenue = 12

number of units required to increase revenue by $6,000:

= (fixed costs + desired profits) / contribution margin

= ($15,000 + $6,000) / $7.80 = $21,000 / $7.80 = 2,692.31 ≈ we must round up to $2,693 units