Question

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			16,000
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 $39. 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.

Calculate the net profit before the introduction of Product C.

Net Profit : ______

Calculate the Net profit if Roland company introduces Product C

Net Profit : ________

Should Roland Introduce product C ?

Yes or No???

Answer 1

Given Information,

Before introduction of Product C

Product	A	B
Units Sold	8000	16000
Seeling Price p.u	$65	$52
Variable Cost p.u	$35	$30
Fixed Cost	$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.

After introduction of Product C

Product	A	B	C
Units Sold	8000*110%=8800	0	11000
Seeling Price p.u	$65	$52	$80
Variable Cost p.u	$35	$30	$39
Fixed Cost	$15	$15	$15

Answer to Question 1:Calculation of Net Profit before introduction of Product C=$232,000

Product	A	B	Total
Units Sold	8000	16000	24000
Seeling Price p.u	$65	$52
Variable Cost p.u	$35	$30
Contribution per unit	$30	$22
Total Contribution	$240,000	$352,000	$592,000
Fixed Cost per unit	$15	$15
Total Fixed Cost	$120,000	$240,000	$360,000
Net profit	$120,000	$112,000	$232,000

Working Note 1:

It is given in question that ,For purposes of simplicity, the firm allocates total fixed costs over the total number of units of A and B produced and sold.

Calculation of Total Fixed Cost=$15 X 8000 units of A+$15 X 16000 units of B=$360,000

It is assumed that Total fixed cost will remain unchanged i.e $360,000 & the only allocation of fixed cost will change.Allocation of Fixed cost is to be done on the basis of total number of units of A & B sold or Units A & C sold.

Hence ,Allocation of Total Fixed cost $360,000 between A & C would be,

Product	A	B	Total
Units Sold	8000*110%=8800	11000	19,800
Allocation of Fixed cost	$360,000/19,800 units*8800 units	$360,000/19,800 units*11,000 units
Fixed Cost Allocation	$160,000	$200,000	$360,000

Answer to Question 2:Calculation of Net Profit after introduction of Product C=$355,000

Product	A	C	Total
Units Sold	8000*110%=8,800	11,000	19,800
Seeling Price p.u	$65	$80
Variable Cost p.u	$35	$39
Contribution per unit	$30	$41
Total Contribution	$264,000	$451,000	$715,000
Total Fixed Cost ( Refer WN 1 )	$160,000	$200,000	$360,000
Net profit	$104,000	$251,000	$355,000

Answer to Question 3: Should Roland Introduce product C ?Yes or No???

Ronald should introduce Product C.Additional profit of $ 123,000 would be earned if Product C is introduced .

Particulars	Before Introduction of C	After Introduction of C	Additional Profit due to Introduction of C
Total Contribution	$592,000	$715,000	$123,000
Total Fixed Cost ( Refer WN 1 )	$-360,000	$-360,000	0
Net profit	$232,000	$355,000	$123,000

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