question archive Pineapple Corp
Pineapple Corp
Subject:AccountingPrice:3.87 Bought7
Pineapple Corp. has annual revenues of $600,000, fixed expenses of $200,000, and an average contribution margin ratio of 30%.
(a) Management is considering adding a new product to the company's product line. The new item will have $14.00 of variable costs per unit. Calculate the selling price that will be required for this product to maintain the 30% average contribution margin ratio on current sales.
(b) If the new product adds an additional $63,000 to Pineapple's fixed expenses, how many units of the new product must be sold at the price calculated in part (a) in order to break even on the new product?
(c) If 25,000 units of the new product could be sold at a price of $18.00 per unit, and the company's other business did not change, calculate Pineapple's total operating income and average contribution margin ratio.
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Answer:
a)
Sales Ratio - Contribution Margin Ratio = Variable cost to sales ratio
If total sales ratio is 100 - then
100% - 30% = 70%
Selling price to be kept to maintain the same contribution margin ratio = Variable cost of new product/ Variable cost ratio
= $14.00/70%
=$20.00
(b)
Break even sales = Fixed cost / Contribution per unit
Additional Fixed Cost = $63,000
Selling Price = $20, Variable Cost = $14
Contribution margin per unit = 20-14 = $6
Breakeven units = $63,000/$6= 10,500 units
(c)
|
Particulars |
Amount $ |
|
Sales |
1,050,000 |
|
Less: Variable Expenses |
770,000 |
|
Contribution margin |
280,000 |
|
Less: Fixed expenses (200,000+63,000) |
263,000 |
|
Net Profit |
$ 17,000 |
Average contribution margin ratio = 26.67%
Note:
New Sales Revenue = $600,000 + 25000 x $18 = $1,050,000
New Variable costs = $420,000 + 25000 x $14 = $770,000
Contribution margin ratio = $280,000/$1,050,000 = 26.67%
