Question

A company sells two products, A and B.

	Product A	Product B
Produced and sold	8.000 units	16.000 units
Sale price per unit	65	52
Variable cost per unit	35	30
Fixed cost per unit	15	15

Fixed cost is divided in a traditional way, based on the produced quantity.

The company started to design a new product C to replace product B. The company could sell 11.000 units of product C with a selling price of 80 per unit. The variable cost of product C is 39 per unit. Product C will have positive effects on the selling of product A with an estimated 10% increase. If the company puts product C on the market and immediately takes product B out of the market, the sale will be unaffected in the next year.

Should the company put product C on the market? Explain with calculations.

Answer 1

Current

Contribution Margin Income Statement
	A	B	Total
Sales Revenue	520,000	832,000	1,352,000
Variable Costs	280,000	480,000	760,000
Contribution Margin	240,000	352,000	592,000
Fixed Costs			360,000
Net Operating Income			232,000

Proposed

Contribution Margin Income Statement
	A	C	Total
Sales Revenue	572,000	880,000	1,452,000
Variable Costs	308,000	429,000	737,000
Contribution Margin	264,000	451,000	715,000
Fixed Costs			360,000
Net Operating Income			355,000

Since net operating income increases by $123,000 Product B should be replaced by Product C