Plevna Manufacturing makes and distributes small prefabricated homes in kits. The kits contain all the pieces needed to assemble the home and all that is required is the builder erects the home on a foundation.
The variable cost to make each kit is $30,000 and the selling price per kit is $40,000, with variable selling and distribution costs averaging about $5,000 per home kit.
Currently, the company is operating at capacity, which is dictated by the machinery in the manufacturing division. Each kit requires about 10 hours of machine time and the total available machine time is 5,000 hours per year. Plevna Manufacturing is currently making and selling 500 kits a year. Increasing the plant capacity in the foreseeable future is not a viable option.
Willie Scott is the companys salesperson. Willie has recently been approached a number of times by people wanting to buy cottages to erect on recreational properties. The cottages would be made by modifying the existing home product. The modification process would begin with a completed home kit. The manufacturing division would then incur additional materials and labour costs of $3,000 and three hours of machine time to convert a home kit into a cottage kit.
The variable selling and administrative costs associated with each cottage kit are estimated as $4,000 in addition to the $5,000 cost of the regular kit.
Required:
Given this information, what is the minimum price Plevna should charge for the cottage kit?