Question

Cabin Creek Company is considering adding of a new line of kitchen cabinets. The company’s accountant provided the following estimated data for these cabinets: Annual sales $ 800 units

Selling price per unit $ 3,690

Variable manufacturing costs per unit $ 1,690

Variable selling costs per unit $ 540

Incremental fixed costs per year:

Manufacturing $ 494,400

Selling $ 74,000

Allocated common costs per year:

Manufacturing $ 99,000

Selling and administrative $ 131,000

If the kitchen cabinets are added as a new product line, the company expects that the contribution margin earned from selling its other products will decrease by $238,000 per year.

Required:
a. What is the annual financial advantage (disadvantage) of adding the new line of kitchen cabinets?

Answer 1

The annual financial advantage of adding the new line of kitchen cabinets is $361,600, calculated by subtracting the total incremental costs from the contribution margin generated by the new product line.

Step-by-step explanation:

To calculate the annual financial advantage or disadvantage of adding a new line of kitchen cabinets, we need to consider the incremental revenues and incremental costs, including the impact on the contribution margin from other products. Here's the computation:

• Annual sales revenue: 800 units × $3,690 = $2,952,000
• Variable manufacturing costs: 800 units × $1,690 = $1,352,000
• Variable selling costs: 800 units × $540 = $432,000
• Total variable costs: $1,352,000 + $432,000 = $1,784,000
• Contribution margin: $2,952,000 - $1,784,000 = $1,168,000
• Incremental fixed costs: $494,400 (manufacturing) + $74,000 (selling) = $568,400
• Decrease in contribution margin from other products: $238,000
• Total incremental costs: $568,400 + $238,000 = $806,400
• Annual financial advantage (disadvantage): $1,168,000 - $806,400 = $361,600

Therefore, the addition of the new line of kitchen cabinets presents an annual financial advantage of $361,600.