Question

Billy Doors, Vice President of Marketing for Qapmoc Computer, Inc., must decide whether to introduce a mid-priced version of the firm’s CP2010 minicomputer product line—the CP2010-X minicomputer. The CP2010-X would sell for $2,500, with unit variable costs of $1,450. Projections made by an independent marketing research firm indicate that the CP2010-X would achieve a sales volume of 480,000 units next year, in its first year of commercialization. 30 percent of the first year’s volume would come from competitors’ minicomputers and market growth. However, a consumer research study indicates that 40 percent of the CP2010-X sales volume would come from the higher-priced CP2010-Deluxe minicomputer, which sells for $6,450 (with unit variable costs of $2,350). Another 30 percent of the CP2010-X sales volume would come from the economy-priced CP2010-Millenium minicomputer, priced at $1,500 (with unit variable costs of $800). The CP2010-Deluxe unit volume is expected at 350,000 units next year, and the CP2010-Millenium is expected to achieve a 500,000 unit sales level. The fixed costs of launching the CP2010-X have been forecast at $2.5 million during its first year on the market.

Should Mr. Doors add the CP2010-X model to the line of minicomputers?

Answer 1

The main question here is that how much loss of contribution happens to company, if company go for the CP-2010 - X mini computer

The expected sales from new product = 480,000 units

so total contribution rom this new product = 480,000 x (selling price per unit - varibal cost per unit)

so total contribution rom this new product = 480,000 x (2500 - 1450) = 5040,00,000

less contribution loss due to reduction in sales of existing products = 6790,00,000

(1) 40% of sales will be from CP-2010 Deluxe minicomputer

so loss of contribution = 350000 x 40% x (6450 -2350) = 5740,00,000

(2) 30% of sales will be from CP-2010 Millenium minicomputer

so loss of contribution = 500000 x 30% x (1500 -800) = 1050,00,000

so there is a net loss of contribution = 5040,00,000 -6790,00,000 = -1750,00,000   

so manufacturing should not be done

any doubts, feel free to ask

Please give a like, if this answer helps you. Thank You.