Question

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).

MY BANNER ID: @01592154

Answer 1

Given data follows below:

un 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:

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 = 154

20% of the cannibalized amount from Model SMX-1,
30% from Model SMX-2,
50% from Model SMX-3.

un Microsystems will incur a fixed cost of= $300,000

Unit Contribution margin for SMX 4 =$4,000- $154=$3,846 per unit
Contribution margin of existing model:
SMX 1 =$1,800- $1,000 =$800
SMX 2 =$2,700- $1,500=$1200
SMX 3 =$3,000- $2,000=$1000
Additional Contribution margin from sale of SMX 4 =500 *$3,846 =$1,923,000(A)
Total unit sale loss of existing model =500 *40% =200 units
SMX 1 = 200 *20%*$800 =$32,000
SMX 2 = 200 *30%*$1200 =$72,000
SMX 3 = 200 *50%*$1000 =$100,000
Total Contribution margin lost =$204,000(B)
Additional Fixed cost to add new model =$300,000 ©
Net Cash flowby end of 1st year of project =$1,923,000- $204,00- $300,000 =$1,419,000
Since the Net cash flow is positive hence the SMX 4 should be introduced

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