Question

Sun Microsystems, is a manufacturer of mid-size computers, which are primarily used by medium and small businesses. Sun Microsystems’s product line currently consists of three models of mid-size computers. The following data are available regarding the models:

Model	Selling Price per Unit	Variable Cost per Unit	Demand/Year (units)
Model SMX1	$1,800	$1,000	2,500
Model SMX2	$2,700	$1,500	1,000
Model SMX3	$3,000	$2,000	800

Sun Microsystems is considering the addition of a fourth model to its line of mid-size computers.

This model, the SMX-4 would be sold for $4,000.  
The variable cost of this unit is 763
The demand for the new Model SMX4 is estimated to be 500 units per year.  
Forty percent (40%) of the new model’s unit sales are expected to come from other models already being manufactured by Sun Microsystems
20% of the cannibalized amount from Model SMX-1,
30% from Model SMX-2,
50% from Model SMX-3.
Sun Microsystems will incur a fixed cost of $300,000 to add the new model SMX-4 to its product line.

The president of Sun Microsystems will only fund projects which show a positive cash flow by the end of the first year of the project.   

Answer the following questions:

2) What is the contribution for the 3 original product (SMX1, SMX2, SMX3) prior to SMX4?

3) What is unit contribution for SMX-4

4) Based on the your analysis of the above data, should Sun Microsystems add the new Model SMX-4 to its line of mid-size computers?

5) Why (Support answer with detailed analysis of demand and contribution).

Answer 1

Question 2:

	SMX1	SMX2	SMX3
Selling price per unit	1800	2700	3000
(-) Variable cost per unit	1000	1500	2000
Contribution per unit	800	1200	1000
Total units demand	2500	1000	800
Total Contribution	2000000	1200000	800000

Question 3:

unit contribution for SMX 4 = 4000 - 763 = $ 3237 per unit

Question 4 & 5 :

Particulars	Amount($)
40% of sales of Smx 4	800000
Less : Variable costs	152600
Contribution for 40 % sales	647400
Contibution lost for Smx1	400000
Contibution lost for Smx2	360000
Contibution lost for Smx3	400000
Total Contribution Lost	1160000

As the contribution lost is more than the excess contribution. The Smx 4 product should not be launched.