Cabin Creek Company is considering adding a new line of kitchen cabinets. The company’s accountant provided the following estimated data for these cabinets:Annual sales800unitsSelling price per unit$ 3,660 Variable manufacturing costs per unit$ 1,660 Variable selling costs per unit$ 510 Incremental fixed costs per year: Manufacturing$ 491,400 Selling$ 71,000 Allocated common costs per year: Manufacturing$ 96,000 Selling and administrative$ 128,000 If the kitchen cabinets are added as a new product line, the company expects that the contribution margin earned from selling its other products will decrease by $232,000 per year.Required:What is the annual financial advantage (disadvantage) of adding the new line of kitchen cabinets?What is the lowest selling price per unit that could be charged for the cabinets and still make it economically desirable for the company to add the new product line?

The objective of the question is to determine the financial impact of adding a new product line to the company's offerings. This involves calculating the annual financial advantage or disadvantage of adding the new line of kitchen cabinets and determining the lowest selling price per unit that would make it economically viable for the company to add the new product line.First, we need to calculate the total annual revenue from the new product line. This is done by multiplying the annual sales by the selling price per unit. In this case, it would be 800 units * $3,660/unit = $2,928,000.Next, we calculate the total variable costs, which include both the variable manufacturing costs and the variable selling costs. These are calculated as (800 units * $1,660/unit) + (800 units * $510/unit) = $1,336,000 + $408,000 = $1,744,000.The total fixed costs are the sum of the incremental fixed costs and the allocated common costs. These are calculated as $491,400 (manufacturing) + $71,000 (selling) + $96,000 (manufacturing common costs) + $128,000 (selling and administrative common costs) = $786,400.The total costs (both variable and fixed) are then subtracted from the total revenue to get the net income from the new product line. This is calculated as $2,928,000 (revenue) - $1,744,000 (variable costs) - $786,400 (fixed costs) = $397,600.However, the company expects that the contribution margin from its other products will decrease by $232,000 per year if the new product line is added. Therefore, the net impact on the company's income is $397,600 (net income from new product line) - $232,000 (decrease in contribution margin from other products) = $165,600. This is the annual financial advantage of adding the new line of kitchen cabinets.To find the lowest selling price per unit that would make it economically viable for the company to add the new product line, we need to calculate the break-even price. This is the price at which the company would neither make a profit nor incur a loss. It is calculated by dividing the total costs by the number of units sold. In this case, it would be ($1,744,000 (variable costs) + $786,400 (fixed costs) + $232,000 (decrease in contribution margin from other products)) / 800 units = $3,390.50. Therefore, the lowest selling price per unit that would make it economically viable for the company to add the new product line is $3,390.50.The annual financial advantage of adding the new line of kitchen cabinets is $165,600. The lowest selling price per unit that would make it economically viable for the company to add the new product line is $3,390.50.

Answered: Cabin Creek Company is considering…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Annual sales	800	units
Selling price per unit	$ 3,660
Variable manufacturing costs per unit	$ 1,660
Variable selling costs per unit	$ 510
Incremental fixed costs per year:
Manufacturing	$ 491,400
Selling	$ 71,000
Allocated common costs per year:
Manufacturing	$ 96,000
Selling and administrative	$ 128,000

Required:

What is the annual financial advantage (disadvantage) of adding the new line of kitchen cabinets?
What is the lowest selling price per unit that could be charged for the cabinets and still make it economically desirable for the company to add the new product line?

AI-Generated Solution

AI-generated content may present inaccurate or offensive content that does not represent bartleby’s views.

Unlock instant AI solutions

Tap the button
to generate a solution

Click the button to generate
a solution

SEE SOLUTION