The Berwyn Company is considering the addition of a new prod

The Berwyn Company is considering the addition of a new product to its product line. The firm has plenty of excess manufacturing capacity to produce the new product, and its total fixed costs would be unaffected if the new product were added to its line. Nonetheless, the firm\'s accountants decide that a reasonable share of the firm\'s present fixed costs should be allocated to the new product. Specifically, they decide that a $300,000 fixed charge will be absorbed 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 $8.2

Direct materials 1.9

Other 3.9

Total $14

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 Berwyn to add the new product to its line?

Solution

In this situation total fixed cost is unchanged ,it means for producing new product firm will spend only variable cost (making and selling) that is $14per unit.so if firm will increase product fixed cost will decrease.

a)firm should add new product at the price $25 per unit because Price is > then variable cost($14 per unit)

b)Firm may add new 10000 units of product at price of $20 per unit because price is ($20) Greater then variable cost($14)

C) Firm may add new 10000units of product at price of $15 per unit because price is greater then Variable cost ($14)

D) the minimum price will be $14 per unit because firm will get benefit of fixed cost.