In: Accounting
QUESTION 2
Sun Microsystems, is a manufacturer of mid-size computers, which are primarily used by medium and small businesses. Sun Microsystems’s product line currently consists of three models of mid-size computers. The following data are available regarding the models:
Model |
Selling Price per Unit |
Variable Cost per Unit |
Demand/Year (units) |
Model SMX1 |
$1,800 |
$1,000 |
2,500 |
Model SMX2 |
$2,700 |
$1,500 |
1,000 |
Model SMX3 |
$3,000 |
$2,000 |
800 |
Sun Microsystems is considering the addition of a fourth model to its line of mid-size computers.
This model, the SMX-4 would be sold for
$4,000.
The variable cost of this unit is the last 3 digits of your
Banner ID
The demand for the new Model SMX4 is estimated to be 500 units per
year.
Forty percent (40%) of the new model’s unit sales are expected to
come from other models already being manufactured by Sun
Microsystems
20% of the cannibalized amount from Model SMX-1,
30% from Model SMX-2,
50% from Model SMX-3.
Sun Microsystems will incur a fixed cost of $300,000 to add the new
model SMX-4 to its product line.
The president of Sun Microsystems will only fund projects which show a positive cash flow by the end of the first year of the project.
Answer the following (please show work):
Data follows Below
Sun Microsystems, is a manufacturer of mid-size computers, which are primarily used by medium and small businesses. Sun Microsystems’s product line currently consists of three models of mid-size computers. The following data are available regarding the models:
1.What is your Banner ID?
2.What is the contribution for the 3 original product (SMX1, SMX2, SMX3) prior to SMX4?
3. What is unit contribution for SMX-4
Based on the your analysis of the above data, should Sun Microsystems add the new Model SMX-4 to its line of mid-size computers?
4 .Why (Support answer with detailed analysis of demand and contribution).
Model | Selling Price per Unit | Variable cost per Unit | Contribution | Units (d) | Total Contribution |
SMX1 | $1,800.00 | $1,000.00 | (1,800.00 - 1,000.00 ) = $800.00 | 2500 | $2,000,000.00 |
SMX2 | $2,700.00 | $1,500.00 | ( 2,700.00 x 1,500.00 ) = $1,200.00 | 1000 | $1,200,000.00 |
SMX3 | $3,000.00 | $2,000.00 | (3,000.00 - 2,000.00) $1,000.00 | 800 | $800,000.00 |
$4,000,000.00 | |||||
Sollution 3 | |||||
Unit Contribution margin for SMX 4 =$4,000 - $332 =$3668 per unit | |||||
Sollution 4 & 5 | |||||
Working | Amount | ||||
500*$3668 | $1,834,000 | ||||
Total unit sale loss of existing model | 500*40% | 200 units | |||
Total Contribution margin lost (B) | |||||
SMX 1 | 200*20%*$800 | $32,000 | |||
SMX 2 | 200*30%*$1200 | $72,000 | |||
SMX 3 = | 200*50%*$1000 | $100,000 | |||
Total | $204,000 | ||||
Additional Fixed cost to add new model ( C) | Given | $300,000 | |||
Net Cash flow 1st year of project | (A-B-C) | $1,330,000 | |||
Net cash flow is positive So the SMX 4 should be introduced |
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