Roland Company operates a small factory in which it manufactures two products: A and B. Production and sales result for last year were as follow:
A B
- Units sold 8,000 20,000
- Selling price per unit 65 52
- Variable costs per unit 35 30
- Fixed costs per unit 15 15
For purposes of simplicity, the firm allocates total fixed costs over the total number of units of A and B produced and sold.
The research department has developed a new product (C) as a replacement for product B. Market studies show that Roland Company could sell 11,000 units of C next year at a price of $80, the variable costs per unit of C are $29. The introduction of product C will lead to a 10% increase in demand for product A and discontinuation of product B. If the company does not introduce the new product, it expects next year's result to be the same as last year's.
Instructions
Should Roland Company introduce product C next year? Explain why or why not. Show calculations to support your decision.