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4 December, 10:52

Backus Inc. makes and sells many consumer products. The firm's average contribution margin ratio is 27%. Management is considering adding a new product that will require an additional $13,000 per month of fixed expenses and will have variable expenses of $8 per unit. Required: Calculate the selling price that will be required for the new product if it is to have a contribution margin ratio equal to 27%. (Round your answer to 2 decimal places.) Calculate the number of units of the new product that would have to be sold if the new product is to increase the firm's monthly operating income by $8,100. (Do not round intermediate calculations.)

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  1. 4 December, 11:22
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    The correct answer for option (a) is $10.96 and for option (b) is 7,128 units.

    Explanation:

    According to the scenario, the computation of the given data are as follows:

    contribution margin ratio = 27%

    Variable expense = $8 per unit

    Fixed expense = $13,000

    (A) We can calculate the selling price as follows:

    Contribution margin ratio = 100 % - Variable expense ratio

    = 27% = 100% - Variable expense ratio

    = Variable expense ratio = 100% - 27% = 73%

    So, Selling price = Variable expense : Variable expense ratio

    = $8 : 73%

    = $10.96

    (b). Profit = $8,100

    Contribution margin = Selling price - Variable expense = $10.96 - $8 = $2.96

    So. we can calculate the number of units by using following formula:

    Number of units required = (Fixed cost + Profit) : Contribution Margin

    = ($13,000 + $8,100) : $2.96

    = $21,100 : $2.96

    = 7,128.38 units
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