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QUESTION 2 Sun Microsystems, is a manufacturer of mid-size computers, which are primarily used by medium...

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):

  • What is your Banner ID?
  • What is the contribution for the 3 original product (SMX1, SMX2, SMX3) prior to SMX4?
  • 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?
  • Why (Support answer with detailed analysis of demand and contribution).

Solutions

Expert Solution

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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