Question

Johnson and Gomez, Inc. is a small firm involved in the production and sale of electronic business products. The company is well known for its attention to quality and innovation.

During the past 15 months, a new product has been under development that allows users improved access to e-mail and video images. Johnson and Gomez code named the product the Wireless Wizard and has been quietly designing two models: Basic and Enhanced. Development costs have amounted to $205,500 and $286,500, respectively. The total market demand for each model is expected to be 56,000 units, and management anticipates being able to obtain the following market shares: Basic, 20 percent; Enhanced, 15 percent. Forecasted data follow.

	Basic				Enhanced
Projected selling price	$	425.00			$	525.00
Per-unit production costs:
Direct material		58.00				91.50
Direct labor		30.50				46.00
Variable overhead		52.00				64.00
Marketing and advertising (fixed but avoidable)		211,000				380,000
Sales commissions*		10	%			10	%

*Computed on the basis of sales dollars.

Since the start of development work on the Wireless Wizard, advances in technology have altered the market somewhat, and management now believes that the company can introduce only one of the two models. Consultants confirmed this fact not too long ago, with Johnson and Gomez paying $36,100 for an in-depth market study. Sales salaries (excluding commission) will be $93,500 no matter which product is sold. The marketing and advertising costs indicated for each product are incurred only if that product is sold. Other fixed overhead is expected to be the same, regardless of which product is introduced.

Required:

1- Compute the unit contribution margin for both models. (Round your answers to 2 decimal places.)

2- Which of the following should be ignored in making the product-introduction decision? (You may select more than one answer.)

-Development costsunanswered

-Market studyunanswered

-Marketing and Advertisingunanswered

-Fixed manufacturing overheadunanswered

-Variable manufacturing overheadunanswered

-Sales salaries

3-

3-a. Prepare a financial analysis and determine which of the two models should be introduced.

3-b. The company would be advised to select the Enhanced model or Basic model?

4-What other factors should Johnson and Gomez, Inc. consider before a final decision is made? (You may select more than one answer.)

-Possibility of merger of the firm with a bigger playerunanswered

-Growth potential of the Basic and Enhanced modelsunanswered

-Competitive products in the marketplaceunanswered

-Aesthetic differences between the two productsunchecked

-Break-even pointsunanswered

-Data validityunanswered

-Previous years' sales trendsunanswered

-Production feasibilityunanswered

-Effects, if any, on existing product sales

Answer 1

1)

	Basic	Enhanced
Selling price	$425.00	$525.00
Production costs
Direct material	$58.00	$91.50
Direct labour	$30.50	$46.00
Variable overhead	$52.00	$64.00
Sales commission	$42.50	$52.50
Contribution margin per unit	$242.00	$271.00

2) Development costs, market study costs and sales salaries becuase these costs will be incurred irrespective of which product is introduced.

3a)  

	Basic	Enhanced
Contribution margin per unit	$242.00	$271.00
Units	11200	8400
Total Contribution margin	$27,10,400	$22,76,400
Marketing and advertising	$2,11,000	$3,80,000
Operating income	$24,99,400	$18,96,400

3b) The company is advised to select Basic model since the operating income is higher.

4)

• Growth potential of Basic and Enhance models
• Competitive products in the market
• data validity
• production feasibiltiy
• previous years sales trend
• effect of any on existing product sales