In: Finance
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?
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 | ||||||