Problem 14-46 Introducing a New Product (LO 14-4, 14-5) [The following informati
ID: 2342718 • Letter: P
Question
Problem 14-46 Introducing a New Product (LO 14-4, 14-5)
[The following information applies to the questions displayed below.]
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 $198,000 and $279,000, respectively. The total market demand for each model is expected to be 51,000 units, and management anticipates being able to obtain the following market shares: Basic, 25 percent; Enhanced, 20 percent. Forecasted data follow.
*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 $35,600 for an in-depth market study. Sales salaries (excluding commission) will be $91,000 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.
Problem 14-46 Part 3
Basic Enhanced Projected selling price $ 400.00 $ 500.00 Per-unit production costs: Direct material 53.00 84.00 Direct labor 28.00 41.00 Variable overhead 47.00 59.00 Marketing and advertising (fixed but avoidable) 206,000 355,000 Sales commissions* 15 % 20 % Req 3A Req 3B Prepare a financial analysis and determine which of the two models should be introduced. (Round intermediate calculations to 2 decimal places.) Basic Enhanced Total contribution margin Less: Marketing and advertising Income 206,000 355,000 $ (206,000) $ (355,000)Explanation / Answer
3.a)
Preparation of Financial analysis
Note :
1)Development cost of $ 198000 & $ 279000 are sunk cost as they have been already incurred and it will not affect the decision making process
2)In depth market study cost of $ 35600 is also sunk cost as it has been already paid, it will not affect the decision making process
3) Sales Salaries of $ 91000 is irrelevant as the same cost will be incurred no matter which product is sold, therefore it has not been considered in decision making process.
Since Income under Enhanced model is greater than income under basic model, enhanced model should be introduced in the market.
b) Other factors that Johnson & Gomez Inc should consider before making a final decision are:
- Competitive products in the market place
- Aesthetic differences between the two products
- Break even points
- Data Validity
- Production feasebility
- Gowth potential of the basic & enhanced model
Particulars Basic ($) Enhanced($) Selling Price (Per Unit) (A) 400 500 Variable Production Cost Dirtect Material 53 84 Direct labour 28 41 Variable OH 47 59 Sales Commision (% of Sales Price) 60 100 Total Variable Prodn Cost (B) 188 284 Contribution per unit (C=A-B) 212 216 Market Demand (D) 51000 units 51000 units Total Contribution Margin (C*D) 10812000 11016000 Less: Marketing & Advertising 206000 355000 Income 10606000 10661000