Johnson and Gomez, Inc. is a small firm involved in the production and sale of electronic business products. The company is well known for its attention to quality and innovation.
During the past 15 months, a new product has been under development that allows users handheld access to e-mail and video images. Johnson and Gomez code named the product the Wireless Wizard and has been quietly designing two models: Basic and Enhanced. Development costs have amounted to $121,000 and $175,000, respectively. The total market demand for each model is expected to be 40,000 units, and management anticipates being able to obtain the following market shares: Basic, 25 percent; Enhanced, 20 percent. Forecasted data follow.
| |
Basic |
Enhanced |
| Projected selling price |
$ |
250 |
|
$ |
330 |
|
| Per-unit production costs: |
|
|
|
|
|
|
| Direct material |
|
28 |
|
|
45 |
|
| Direct labor |
|
15 |
|
|
20 |
|
| Variable overhead |
|
24 |
|
|
32 |
|
| Marketing and advertising |
|
130,000 |
|
|
200,000 |
|
| Sales salaries |
|
57,000 |
|
|
57,000 |
|
| Sales commissions* |
|
10 |
% |
|
10 |
% |
|
| *Computed on the basis of sales dollars. |
Since the start of development work on the Wireless Wizard, advances in technology have altered the market somewhat, and management now believes that the company can introduce only one of the two models. Consultants confirmed this fact not too long ago, with Johnson and Gomez paying $23,000 for an in-depth market study. The total fixed overhead is expected to be the same, regardless of which product is manufactured.
1. Compute the per-unit contribution margin for both models.
2. Prepare a financial analysis and determine which of the two models should be introduced.