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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 $201,000 and $282,000, respectively. The total market demand for each model is expected to be 53,000 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 | $ | 410.00 | $ | 510.00 | |||
| Per-unit production costs: | |||||||
| Direct material | 55.00 | 87.00 | |||||
| Direct labor | 29.00 | 43.00 | |||||
| Variable overhead | 49.00 | 61.00 | |||||
| Marketing and advertising (fixed but avoidable) | 208,000 | 365,000 | |||||
| Sales commissions* | 15 | % | 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 $35,800 for an in-depth market study. Sales salaries (excluding commission) will be $92,000 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.
Compute the unit contribution margin for both models. (Round your answers to 2 decimal places.)
Which of the following should be ignored in making the product-introduction decision? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)
Development costsunanswered
Market studyunchecked
Marketing and Advertisingunanswered
Fixed manufacturing overheadunanswered
Variable manufacturing overheadunanswered
Sales salaries
3-a. Prepare a financial analysis and determine which of the two models should be introduced.
BasicEnhanced
Total contribution margin
Income
3-b. The company would be advised to select the Enhanced model or Basic model?
What other factors should Johnson and Gomez, Inc. consider before a final decision is made? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)
Possibility of merger of the firm with a bigger playerunanswered
Growth potential of the Basic and Enhanced modelsunanswered
Competitive products in the marketplaceunanswered
Aesthetic differences between the two productsunanswered
Break-even pointsunanswered
Data validityunanswered
Previous years' sales trendsunanswered
Production feasibilityunanswered
Effects, if any, on existing product sales
| 1) Compute the unit contribution margin for both models. (Round your answers to 2 decimal places.) | ||
| Basic | Enhanced | |
| Projected selling price | $410.00 | $510.00 |
| Less: Variable cost | ||
| Direct material | $55.00 | $87.00 |
| Direct labor | $29.00 | $43.00 |
| Variable overhead | $49.00 | $61.00 |
| Sales Commission (15% , 10%) | $61.50 | $51.00 |
| Total Variable Cost | $194.50 | $242.00 |
| Contribution Margin per unit | $215.50 | $268.00 |
| 2) Which of the following should be ignored in making the product-introduction decision? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.) | ||
| Development costs | Irrelevant | Sunk Cost |
| Market study | Irrelevant | Sunk Cost |
| Marketing and Advertising | Relevant | |
| Fixed manufacturing overhead | Irrelevant | It will be incurred regardless of which product is selected. |
| Variable manufacturing overhead | Relevant | |
| Sales salaries | Irrelevant | identical for both products |
| 3-a. Prepare a financial analysis and determine which of the two models should be introduced. | ||
| Basic | Enhanced | |
| Total contribution margin | ||
| Basic = 53,000 x 20% x $215.50 | $2,284,300.00 | $2,130,600.00 |
| Enhanced = 53,000 x 15% x $268 | ||
| Less: Marketing and advertising | -$208,000.00 | -$365,000.00 |
| Income | $2,076,300.00 | $1,765,600.00 |
| 3-b. The company would be advised to select the Enhanced model or Basic model? | ||
| Basic Model Should be selected | ||
| 4) What other factors should Johnson and Gomez, Inc. consider before a final decision is made? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.) | ||
| Possibility of merger of the firm with a bigger player | ||
| Growth potential of the Basic and Enhanced models | ||
| Competitive products in the marketplace | ||
| Aesthetic differences between the two products | ||
| Break-even points | ||
| Data validity | ||
| Previous years' sales trends | ||
| Production feasibility | ||
| Effects, if any, on existing product sales |
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