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Relevant costs and Operating Income

The Flint Fan Company is considering the addition of a new model fan, the F-27, to its current product lines. The expected cost and revenue data for the F-27 fan are as follows:

Annual Sales in units 4,000
Unit Selling Price $58
Unit Variable Costs:
Production $34
Selling $4

Avoidable fixed costs per year:
Production $20,000
Selling $30,000

If the F-27 model is added as a new product line, it is expected that the contribution margin of other product lines at Flint will drop by $7,000 per year.

Problem 1: If the F-27 product line is added next year, calculate the change in operating income.

Problem 2: Calculate the lowest unit selling price that could be charged for the F-27 model and still make it economically desirable for Flint to add the new product line.

Solution Preview

The Flint Fan Company is considering the addition of a new model fan, the F-27, to its current product lines. The expected cost and revenue data for the F-27 fan are as follows:

Annual Sales in units 4,000
Unit Selling Price $58
Unit Variable Costs:
Production $34
Selling $4

Avoidable fixed costs per year:
Production $20,000
Selling ...

Solution Summary

Response gives steps to compute the relevant cost, operating income and taking important decisions such as lowest selling price for the product.

$2.19