Question

Tharp Company operates a small factory in which it manufactures two products: C and D. Production and sales results for last year were as follows.

		C		D
Units sold		9,200		19,900
Selling price per unit		$95		$78
Variable cost per unit		49		42
Fixed cost per unit		25		25

For purposes of simplicity, the firm averages total fixed costs over the total number of units of C and D produced and sold.

   The research department has developed a new product (E) as a replacement for product D. Market studies show that Tharp Company could sell 11,600 units of E next year at a price of $114; the variable cost per unit of E is $42. The introduction of product E will lead to a 12% increase in demand for product C and discontinuation of product D. If the company does not introduce the new product, it expects next year’s results to be the same as last year’s.

Compute company profit with products C & D and with products C & E.

Net profit with products C & D		$
Net profit with products C & E		$

Should Tharp Company introduce product E next year? (Yes or NO)

e7.17

Answer 1

Solution:

Calculation of the Net Profit of the Company with Products C and D

	Product C		Product D
	Total (9,200 Units)	Per Unit	Total (19,900 Units)	Per Unit
Sales $	8,74,000.00	95.00	15,52,200.00	78.00
Less: Variable Cost $	4,50,800.00	49.00	8,35,800.00	42.00
Contribution $ = Sales - Variable Cost	4,23,200.00	46.00	7,16,400.00	36.00
Less: Fixed Cost $	2,30,000.00	25.00	4,97,500.00	25.00
Net Income $ = Contribution - Fixed Cost	1,93,200.00	21.00	2,18,900.00	11.00
Total Income of the Company $	4,12,100.00

Therefore, total Income of the Company with products C and D is $412,100.00.

Calculation of the Net Profit of the Company with Products C and E

Total Fixed Cost of the Company = $2,30,000 + $4,97,500 = $727,500

New Sales of Product C = 9,200 x 1.12 = 10,304 Units

Total Units Sold = Units of C + Units of E = 10,304 + 11,600 = 21,904 Units

Therefore, Fixed Cost per unit Sold = Total Fixed Cost / Total Units Sold

                                                              = $727,500 / 21,904 = $33.21 per Unit

	Product C		Product E
	Total (10,304 Units)	Per Unit	Total (11,600 Units)	Per Unit
Sales $	9,78,880.00	95.00	13,22,400.00	114.00
Less: Variable Cost $	5,04,896.00	49.00	4,87,200.00	42.00
Contribution $ = Sales - Variable Cost	4,73,984.00	46.00	8,35,200.00	72.00
Less: Fixed Cost $	3,42,227.90	33.21	3,85,272.10	33.21
Net Income $ = Contribution - Fixed Cost	1,31,756.10	12.79	4,49,927.90	38.79
Total Income of the Company $	5,81,684.00

Therefore, total Income of the Company with products C and E is $581,684.

Should the company introduce Product E next year?

Yes, the company should introduce Product E next year as it increases its Net Income by $169,584 ($5,81,684 - $4,12,100).