Reference no: EM132654843

ABC Manufacturing makes and distributes small prefabricated homes in kits. The kits contain all the pieces needed to assemble the home, and all that the builder must do is assemble the home on a foundation.

• The variable cost to make each kit is $30,000, and the selling price per kit is $40,000; variable selling and distribution costs average 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. ABC Manufacturing is currently making and selling 500 kits a year. Increasing the plant capacity in the foreseeable future is not a viable option.
• The company's salesperson has recently been approached a number of times by people wanting to buy cottages to assemble 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 at $4,000 in addition to the $5,000 cost of the regular kit.

Problem 1: Given this information, what is the minimum price ABC should charge for the cottage kit? Explain your position clearly