Question

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 332
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 questions:

1. 2) What is the contribution for the 3 original product (SMX1, SMX2, SMX3) prior to SMX4?
2. 3) What is unit contribution for SMX-4
3. 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. 5) Why (Support answer with detailed analysis of demand and contribution).

Answer 1

Sollution 2
contribution for the 3 original product (SMX1, SMX2, SMX3) prior to SMX4
Model	Selling Price per Unit (a)	Variable cost per Unit (b)	Contribution per unit (c=a-b)	Units (d)	Total Conribution (e=c*d)
SMX1	$1,800.00	$1,000.00	$800.00	2500	$2,000,000.00
SMX2	$2,700.00	$1,500.00	$1,200.00	1000	$1,200,000.00
SMX3	$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
Additional Contribution margin from sale of SMX 4 (A)				500*$3668	$1,834,000
Total unit sale loss of existing model	500*40%	200 units
Total Contribution margin lost (B)
Lost Contribution margin of SMX 1	200*20%*$800	$32,000
Lost Contribution margin of SMX 2	200*30%*$1200	$72,000
Lost Contribution margin of SMX 3 =	200*50%*$1000	$100,000
Total		$204,000
Additional Fixed cost to add new model ( C)	Given	$300,000
Net Cash flow by end of 1st year of project	(A-B-C)	$1,330,000
Since the Net cash flow is positive hence the SMX 4 should be introduced