Question

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

Item C D

Units sold 9,000 20,000

Selling price per unit 98 75

Variable cost per unit 50 40

Fixed cost per unit 24 24

For purposes of simplicity, the firm averages total fixed costs over the total number of units produced. The research department has developed a new product (E) as a replacement for product D. Market studies show that the firm could sell 10,000 units of E next year at a price of TL115. The variable cost per unit of E is TL47. The introduction of E will lead to a 11% 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.

Q-1) Calculate net income for the next year if the company does not introduce product E.

Q-2) Calculate net income for the next year if the company introduces product E.

Answer 1

1)
Item	C	D	Total
Units sold	9000	20000
Sales	$ 882,000.00	$  1,500,000.00	$ 2,382,000.00
Less: Variable Cost	$ 450,000.00	$     800,000.00	$ 1,250,000.00
Contribution Margin	$ 432,000.00	$     700,000.00	$ 1,132,000.00
Fixed Cost			$    696,000.00
Net Operating Income			$    436,000.00
* Fixed costs = $24 X (9,000 + 20000) =	$ 696,000.00
2)
Item	C	E	Total
Units sold	9990	10000
Sales	$ 979,020.00	$  1,150,000.00	$ 2,129,020.00
Less: Variable Cost	$ 499,500.00	$     470,000.00	$    969,500.00
Contribution Margin	$ 479,520.00	$     680,000.00	$ 1,159,520.00
Fixed Cost			$    696,000.00
Net Operating Income			$    463,520.00
Product C sales increase by 11%, (9,000 X 111%)
Yes they should introduce Product E since net profit  ($463,520 – $436000).	$   27,520.00