Question

Video Concepts, Inc. (VCI) manufactures a line of videocassette recorders (VCRs) that are distributed to large retailers. The line consists of three models of VCRs. The following data are available regarding the models:

Model	VCR Selling Price per Unit	Variable Cost per Unit	Demand/Year (units)
Model LX1	$175	$100	2,000
Model LX2	$250	$125	1,000
Model LX3	$300	$140	500

VCI is considering the addition of a fourth model to its line of VCRs:

• This model would be sold to retailers for $375.
• The variable cost of this unit is $225.
• The demand for the new Model LX4 is estimated to be 300 units per year.
• Sixty percent of these unit sales of the new model is expected to come from other models already being manufactured by VCI:
  • 20 percent from Model LX1
  • 30 percent from Model LX2
  • 50 percent from Model LX3.
• VCI will incur a fixed cost of $20,000 to add the new model to the line.

Answer the following:

• Based on the preceding data, should VCI add the new Model LX4 to its line of VCRs? Why?

Make sure you are responding to each part of every question. You do not have to show your work for each question, but I recommend it because partial credit will be given for completing the right steps even if your final answer is incorrect.

Answer 1

Total profit under three models is as follows:-

Model	Selling price	Variable cost	Contribution cost	Demand	Profit
Model LX1	$175	$100	$75	2000	$150,000
Model LX2	$250	$125	$125	1000	$125,000
Model LX3	$300	$140	$160	500	$80,000
Total profit					$355,000

Model LX4

Selling cost = $375

Variable cost = $225

Contribution = $150

Total units produce = 300 units.

60% of the units of model LX4 is came from existing units in the given proportion

Model	Existing demand	Proportion	Working	Model LX4	New Demand
Model LX1	2000	20%	20% of 180 units	36	1964
Model LX2	1000	30%	30% of 180 units	54	946
Model LX3	500	50%	50% of 180 units	90	410

Total demand of new Model LX4 = 180 units came from existing units and ( 300 - 180 ) 120 units made with new facility.

Showing table for new demands and total profit as follows:-

Model	Selling price	Variable cost	Contribution cost	Demand	Profit
Model LX1	$175	$100	$75	1964	$147,300
Model LX2	$250	$125	$125	946	$118,250
Model LX3	$300	$140	$160	410	$65,600
Model LX4	$375	$225	$150	300	$45,000
Total profit					$376,150

Net profit = ( $376150 - $20000 ) = $356150

Profit with new model = $356150

Profit under existing = $355000

With the introduction of new model there is higher profit of ( $356150 - $355000 ) = $1150.

Decision :- VCI should add new model LX4 into in its product line.