The Cabinet Shoppe is considering the addition of a new line of kitchen cabinets

Question

The Cabinet Shoppe is considering the addition of a new line of kitchen cabinets to its current product lines. Expected cost and revenue data for the new cabinets are as follows:

  
If the new cabinets are added, it is expected that the contribution margin of other product lines at the cabinet shop will drop by $22,800 per year.

If the new cabinet product line is added next year, the increase in net operating income resulting from this decision would be:

$422,200

$445,000

$556,800

$398,600

  Annual sales 6,400 units       Selling price per unit $250       Variable costs per unit:      Production $134          Selling $29       Avoidable fixed costs per year:      Production $45,900          Selling $65,900       Allocated common fixed costs per year $46,400    

Explanation / Answer

422,200

*

Units $   Selling price per unit                250        6,400        1,600,000   Variable costs per unit:      Production                134        6,400           857,600      Selling                  29        6,400           185,600 Contribution Margin           556,800   Avoidable fixed costs per year:      Production           (45,900)      Selling           (65,900)           445,000 Contribution loss             22,800           422,200

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