Question

Additional Information

The company has three models of brewers that offer different features, such as the size of the water reservoir, the number of brewing sizes, and the types of filtering devices used in the machine. Data from the most recent fiscal year for the three models is shown below.

	Model
	Home Brewer	Office Brewer	European Deluxe
Sales volume (units)	12,000	30,000	6,000
Unit selling price	$150	$200	$300
Variable cost per unit	120	140	180
Contribution margin per unit	$30	$60	$120

Fixed costs are $1,500,000 per year. The company has no work in process or finished goods inventories. The company is facing increased levels of competition from manufacturers using similar brewing technologies and believes there is no room for any increases in unit selling prices.

Dark and Bold Inc. is unsure of the strategies to take in order to increase profitability. The engagement partner would like the following questions on his desk by Monday morning:

1.The company is considering adding a new product to its line of brewers targeted at the office use market (both the Office Brewer and European Deluxe are currently targeting office users). The new brewer, the Office Plus, would sell for $250 per unit and would have variable unit costs of $160. Introducing the new model would increase fixed costs by $102,000 annually and reduce annual unit sales of the Office Brewer and European Deluxe models by 10% each. Assuming no change to the sales of the Home Brewer model, how many units of the Office Plus would need to be sold to justify its addition to the product line next year?

Answer 1

Solution:

	Home Brewer	Office Brewer	European Deluxe
Loss of Units due to introduction of New Model (10%)	0	3000	600
Contribution margin per unit	$30.00	$60.00	$120.00
Loss of Contribution Margin (Loss of units*Contribution margin per unit)	$0.00	$180,000.00	$72,000.00
Total Loss of Contribution Margin	= $180000 + $72000 = $252,000

Contribution margin per unit of New Model Office Plus = $250 - $160 = $90

Units of Office Plus Need to be sold = (Increase in Fixed Costs + Loss of Contribution Margin on Existing models)/ Contribution margin per unit of Office plus

= ($102,000 + $252,000) / $90

= 354,000 / $90

= 3933.333 units

= 3933 units (rounded)