Question

EBP Limited is a small firm involved in the production and sale of electronic business products. The company is well known for its attention to quality and innovation. During the past 15 months, a new product has been under development that allows users handheld access to email and video images. EBP has been designing two models: Standard and Enhanced. Development costs have amounted to RM181,500 and RM262,500 respectively. The total market demand for each model is expected to be 40,000 units and management anticipate being able to obtain the following market shares: Standard 25%; Enhanced 20%. EBP paying RM34,500 for an in-depth market study. Forecast the following data: Standard (RM) Enhanced (RM) Projected selling price 375 495 Production cost per unit:      Direct material 42 67.50      Direct labor 22.5 30      Variable overhead 36 48      Fixed overhead 54 72 Marketing and advertising per product line 195,000 300,000 Sales salaries per product line 85,500 85.500

Required: Calculate the per unit contribution margin for both models.                                        Which of the data above should be ignored in making the product introduction decision? For what reason?                                                                                                               Prepare a financial analysis and determine which of the models should be introduced.

Answer 1

	Ans a.	Amt RM
	Products	Standard	Enhanced
	Total Market demand of Each product in units	40,000.00	40,000.00
	Market share of Each Product	25%	20%
Q	Estimated Market for Each Product in Units	10,000.00	8,000.00
	Unit Contribution Margin Calculation
a	Unit Selling Price	375.00	495.00
	Less : Variable costs per Unit
	Direct Materials	42.00	67.50
	Direct Labor	22.50	30.00
	Variable Overhead per unit	36.00	48.00
b	Total Unit Variable cost	100.50	145.50
c	Unit Contribution Margin =a-b=	274.50	349.50	Ans a.
	Ans c.
d	Total Contribution Margin from estimated sales units=Q*c=	2,745,000.00	2,796,000.00
	Less : Fixed Costs :
e	Fixed Production Overhead per unit	54.00	72.00
f	Total Fixed Overhead =Q*e=	540,000.00	576,000.00
g	Marketing & Advertising	195,000.00	300,000.00
h	Sales Salaries	85,500.00	85,500.00
i	Total Fixed Cost =f+g+h=	820,500.00	961,500.00
j	Net Operating Income =c-i=	1,924,500.00	1,834,500.00
	As Standard model will give higher total net operating income , Standard Model should be
	introduced based on the unit sales as per the market study.

Ans b.
The R&D Expenses and the Market study expenses as given in the question details should
be ignored for product introduction decision as those are sunk costs and will not change
whichever model is introduced.