Reference: 09-08
the Western Company Is Considering the Addition of a New

question 81

Multiple Choice

Reference: 09-08
The Western Company is considering the addition of a new product to its current product lines. The expected cost and revenue data for the new product are as follows: $$\begin{array} { | l | l | l | } \hline \text { Annual sales } & 3,000 & \text { units } \\\hline \text { Selling price per unit } & \$ 309 & \\\hline \text { Variable costs per unit: } & & \\\hline \text { Production } & \$ 130 & \\\hline \text { Selling } & \$ 50 & \\\hline \text { Avoidable fixed costs per year: } & & \\\hline \text { Production } & \$ 51,000 & \\\hline \text { Selling } & \$ 75,000 & \\\hline \text { Unavoidable allocated fixed corporate costs per year } & \$ 54,000 & \\\hline\end{array}$$ If the new product is added to the existing product line, then sales of existing products will decline. As a consequence, the contribution margin of the other existing product lines is expected to drop $78,000 per year.
-What is the lowest selling price per unit among those listed below that could be charged for the new product and still make it economically desirable to add the new product?

• A)$222.
• B)$291.
• C)$249.
• D)$240.

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Definitions:

Board of Directors

A group of individuals elected to represent shareholders and make major decisions regarding the company's management, operations, and financial policy.

Business Judgment Rule

A legal principle that protects company directors and officers from liability for decisions made in good faith and in the company's best interest.

Insider Trading

The illegal practice of trading on the stock exchange to one's own advantage through having access to confidential information.

Binding Arbitration

A legal process where a dispute is resolved by an impartial third party, whose decision is final and binding.