Question:
Return to Problem 3-26. Kip mar Company"s managers are considering expanding the product line by introducing a leather briefcase. The new briefcase is expected to sell for $90; variable costs would amount to $36 per briefcase. If Kip mar introduces the leather briefcase, the company will incur an additional $300,000 per year in advertising costs. Kip mar"s marketing department has estimated that one new leather briefcase would be sold for every four molded briefcases.
Required
1. If managers decide to introduce the new leather briefcase, given the cost changes on the molded briefcase presented in Problem 3-26, how many units of each briefcase would be required to break even in the coming year? Cost of good sold for the molded briefacse is expected to be $13.80 per unit.
2. After additional research, Kip mar"s marketing manager believes that if the price of the new leather briefcase drops to $66, it will be more attractive to potential customers. She also believes that at that price, the additional advertising cost could be cut to $177,600.
These changes would result in sales of one molded briefcase for every three leather briefcases. Based on these circumstances, how many units of each briefcase would be required to break even in the coming year?
3. What additional factors should Kip mar"s managers consider before deciding to introduce the new leather briefcase?