Question

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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.

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

	Basic Enhanced Unit contribution margin

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

	Basic Enhanced Total contribution margin Income $0 $0

Answer 1

A:- Per-unit contribution margins:

Basic Enhanced

Selling price . $425.00 $525.00

Less: Variable costs:

Direct material. $58.00 $91.50

Direct labour. 30.50 46.00 Variable manufacturing overhead. 52.00. 64.00

Sales commission

$425x10%; $525 x10% 42.50. 52.50

Unit contribution margin. $242.00 $271.00

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

It expects to sell 10 000 Standard units (40 000 units x25%) or 8,000 Enhanced units (40000 units x20%). On the basis of this sales forecast, the company would be advised to select the basic model.

Basic . Enhanced

Total contribution margin:

11200 units x$242; 8,400 units x$271 $2,710,400. $2,276,400 Less: Marketing and advertising. 211,000. 380,000 Profit. $2499,400 $1896,400

Note: This financial analysis is extremely rudimentaryand assumes that this decision is of ashort-term nature, however in reality this may be a decision that has profit implications.