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Mike Leon is the marketing director of Heatweb Inc that specializes in HVAC products. The company...

  1. Mike Leon is the marketing director of Heatweb Inc that specializes in HVAC products. The company presently sells low end priced version of the firm’s UNX100 model, midpriced Model UNX500, and moderately premium version model UNX 800. The UNX100 model is sold to distributors at $1300 and this model’s unit variable cost is $1100. Heatweb sold about 1400 units of UNX100 in the past year. The mid priced model UNX500 was not very successful in the market and it achieved a sales volume of only 400 units past year at selling price of $1800. The unit variable cost for UNX800 was estimated to be $1450. On the other hand, the recently introduced model UNX800 was somewhat successful with a annual sales volume of 1000 units. The contribution margin for UNX800 was somewhat reasonable, given that this was a new product in Heatweb’s product line. The selling price of UNX800 was fixed at $2000 and variable cost for this model was $1800.

Driven by the success of UNX 800 and based on the assessment of attractiveness of premium segment in HVAC product category, Mike Leon was contemplating the idea of introducing a newer premium model of LUX1400 to expand the product line of Heatweb. Mike estimated that the fixed costs of launching LUX1400 will be $30,000.00 per year. LUX1400 can be sold at the price point of $2600 given the high efficiency of this new model and the fact that consumers are seeking high efficiency HVAC systems theses days. With stringent cost control and quality standard measures introduced by the company, the unit variable cost for LUX will be around $2200. Mike estimates that 600 units of LUX1400 can be sold easily in the first of commercialization. Sixty percent of the sales volume for LUX1400 will be from new customers to the company and the remaining may be through cannibalization of sales from existing customers. The marketing research suggests that forty percent of the sales for LUX1400 will be from other models already manufactured by Heatweb, with 80 percent from UNX 800 and ten percent each from UNX100 and UNX500. Should Mike Lean add LUX1400 model to the product line of Heatweb? Why?

Solutions

Expert Solution

Selling price Variable cost Units sold
UNX100        1,300        1,100             1,400
UNX500        1,800        1,450                400
UNX800        2,000        1,800             1,000
LUX1400        2,600        2,200                600
Net customers-60%                360
old customers-40%                240
Bifurcation of this 40%
UNX100 80%           192.00
UNX500 10%             24.00
UNX800 10%             24.00
Contribution before LUX1400
Selling price Variable cost Contribution per unit (Selling price less variable cost Units sold Total Contribution- contribution * Units sold
UNX100        1,300        1,100                200        1,400        280,000
UNX500        1,800        1,450                350           400        140,000
UNX800        2,000        1,800                200        1,000        200,000
       2,800        620,000
Contribution after LUX1400
Selling price Variable cost Contribution per unit (Selling price less variable cost Units sold Total Contribution- contribution * Units sold
UNX100        1,300        1,100                200        1,208        241,600
UNX500        1,800        1,450                350           376        131,600
UNX800        2,000        1,800                200           976        195,200
LUX1400        2,600        2,200                400           600        240,000
       3,160        808,400
Since total contribution is going up, it is suggested to add the new product in line

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