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31 January, 03:12

Bates Company plans to add a new item to its line of consumer product offerings. Two possible products are under consideration. Each unit of Product A costs $6 to produce and has a contribution margin of $3, while each unit of Product B costs $12 and has a contribution margin of $4.

What is the differential revenue for this decision?

a.$7

b.$1

c.$6

d.$9

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Answers (1)
  1. 31 January, 04:00
    0
    option (a) $7

    Explanation:

    Data provided in the question:

    Cost of product A = $6

    Contribution margin of product A = $3

    Cost of product B = $12

    Contribution margin of product B = $4

    Now,

    Selling price of product A

    = Cost of product A + Contribution margin of product A

    = $6 + $3

    = $9

    Selling price of product B

    = Cost of product B + Contribution margin of product B

    = $12 + $4

    = $16

    Therefore,

    The differential revenue

    = Selling price of product B - Selling price of product A

    = $16 - $9

    = $7

    Hence,

    the answer is option (a) $7
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