Zeus Opticals is a specialist manufacturer of optical instruments. Zeus has recently expanded its core product market of binoculars into making eyepieces for microscopes / telescopes, and screw-on lenses for digital SLR cameras. The firm believes that it makes little money selling binoculars and that these new markets have great profit potential.
Somewhat to Zeus's surprise, it finds it tough to make money with eyepieces. As of now, the firm is selling the product at a negative profit margin. Yet, Zeus faces intense price pressure in this segment, and thinks that it might have to lower prices by 5% or more to stay competitive. The market for binoculars has been stable for several years, and Zeus expects the trends to continue for the near future. Zeus is most excited about entering the market for screw-on lenses for digital SLR cameras. Although current volumes are small (relatively), Zeus believes that there is substantial market potential for this product. Leveraging its excellent reputation for optics and lenses, Zeus believes that it could reach and sustain two times the current volume of this product. This strategy also seems to make sense financially as this product looks like the most profitable of the three lines, per the firm's accounting records.
The following table provides key information about the product lines. (Note: All data have been disguised for confidentiality. However, relations among data items have been preserved.)
|
|
Eyepieces
|
Binoculars
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Camera Lens
|
|
Sales volume (units)
|
24,000
|
21,000
|
7,000
|
|
Price
|
$64.00
|
$80.00
|
$150.00
|
|
Unit Variable Costs of Licensing & Patent fees
|
8.00
|
20.00
|
25.00
|
|
Unit Variable Cost of Direct Labor & Materials
|
40.00
|
32.00
|
80.00
|
|
Unit Contribution Margin (before overhead)
|
$16.00
|
$28.00
|
$ 45.00
|
|
Unit Profit Margin After Deducting Overhead
|
($5.00)
|
$1.75
|
$10.00
|
|
|
|
|
|
|
Labor hours / unit
|
1.2
|
1.5
|
2.0
|
|
|
|
|
|
The unit contribution margin is computed by subtracting the units cost of licensing and patent fees and direct labor and materials from the selling price.
Currently, the firm incurs $1,300,250 in overhead costs annually. It allocates this overhead among product lines using the number of labor hours used by each product line.