Question

The Bazzar Company is considering the addition of a new product to its product line. An additional $300,000 of fixed charge will be added by the new product. The variable cost per unit of making and selling the new product is $14, which is composed of the following:

Direct labor $8.20

Direct materials 1.90

Other 3.90

Total $14.00

a. Should the Berwyn Company add the new product to its line if it can sell about 10,000 units of this product at a price of $25?

b. Should it add the new product if it can sell about 10,000 units at a price of $20?

c. Should it add the new product if it can sell about 10,000 units at a price of $15?

d. What is the minimum price for the new product that will make it worthwhile for Bazzar to add the new product to its line?

Answer 1

(a) profit from the new product = (price - varibale cost)*quantiity sold - fixed cost

= (25 - 14)*10000 - 300000

= 11*10000 - 300000 = -190000

Since the firm will make a loss, new product line should not be added

(b) profit from the new product = (20 - 14)*10000 - 300000 = -240000

Since the firm will make a loss, new product line should not be added

(c) profit from the new product = (15 - 14)*10000 - 300000 = -290000

Since the firm will make a loss, new product line should not be added

(d) Let minimum price be P

=> (P- 14)*10000 - 300000 >= 0

=> 10000P >= 440000

=> P >= 440000/10000 = 44

Thus, the minimum price is 44 that  will make it worthwhile for Bazzar to add the new product to its line