Problem:
Company X is a small firm innovative in the production and sale of electrical business products. The company is well known for its attention to quality and innovations.
During the past 15 months, a new product has been under development that allows users handheld access to email and video images.
Company X code named the product the Wireless Wizard and had 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%, enhanced 20%
Forecasted data flow:
Basic Enhanced
Projected selling price 250 330
Per unit production costs:
Direct materials 28 45
Direct labor 15 20
Variable overhead 24 32
Fixed overhead 36 48
Marketing an advertise 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 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 Company X paying 23, 000 for an in-depth market study.
1. Compute the per unit contribution margin for both models
2. Which of the data in the table above should be ignored in making the product introduction decision? For what reason?
3. Prepare a financial analysis and determine which of the two models should be introduced.
4. What other factors should Company X consider before a final decision is made?