Question

3. Morningstar Computer, is a manufacturer of mid-size computers, which are primarily used by medium and...

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

               Model          Selling Price            Variable Cost      Demand/Year

                                  Per Computer           Per Computer               (Units)

                MS-1              $1,000                          $800                        2,000

                MS-2              $2,000                        $1,200                        1,000

                MS-3              $2,400                        $1,400                           700

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

This model, the LX-4 would be sold for $3,000.

The variable cost of this unit is the last 3 digits of your Banner ID $215

The demand for the new Model LX-4 is estimated to be 500 units per year.

40% of the new model’s unit sales are expected to come from the existing three models already being manufactured by Morningstar.

10% of the cannibalized amount from Model MS-1,

30% of the cannibalized amount from Model MS-2,

60% of the cannibalized amount from Model MS-3.

Morningstar Computer will incur a fixed cost of $300,000 to add the new model LX-4 to its product line.

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

Questions:

1) What is the unit cannibalization from each of the 3 original products after LX-4 model is launced

2) What is unit contribution for LX-4

3) Based on your data above should Morningstar add the new Model LX-4 and why?

Homework Answers

Answer #1

SOLUTION:

Unit Contribution margin for LX 4 =$3,000 - $215 =$2,785 per unit
Contribution margin of existing model:
MS 1 =$1,000 - $ 800 =$200
MS 2 =$2,000 - $1,200 =$800
MS 3 =$2,400 - $1,400 =$1,000
Additional Contribution margin from sale of LX 4 =500*$2,785 =$1,392,500
Total unit sale loss of existing model =500*40% =200 units
Lost Contribution margin of MS 1 =200*10%*$200 = $4,000
Lost Contribution margin of MS 2 =200*30%*$800 = $48,000
Lost Contribution margin of MS 3 =200*60%*$1,000 = $120,000
Total Contribution margin lost = $172,000
Additional Fixed cost to add new model =$300,000©
Net Cash flowby end of 1st year of project =$1,392,500 - $172,000 - $300,000 =$920,500
Since the Net cash flow is positive hence the LX 4 should be introduced
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Sun Microsystems, is a manufacturer of mid-size computers, which are primarily used by medium and small...
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 LX1 $1,600 $1,000 2,000 Model LX2 $2,400 $1,300 1,000 Model LX3 $2,900 $1,400 500 Sun Microsystems is considering the addition of a fourth model to its line of mid-size computers. This...
Sun Microsystems, is a manufacturer of mid-size computers, which are primarily used by medium and small...
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...
Breakdown written formula /eXCELL banner ID 900838212 Sun Microsystems, is a manufacturer of mid-size computers, which...
Breakdown written formula /eXCELL banner ID 900838212 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 Monster Inc. markets personal computer games through a variety of retail outlets. Presently, Monster is faced with a decision as...
Breakdown written formula /excell banner ID assuming 01716042 Sun Microsystems, is a manufacturer of mid-size computers,...
Breakdown written formula /excell banner ID assuming 01716042 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 Monster Inc. markets personal computer games through a variety of retail outlets. Presently, Monster is faced with a decision...
Please use banner ID: 01716042 Please breakdown in details -Sun Microsystems, is a manufacturer of mid-size...
Please use banner ID: 01716042 Please breakdown in details -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 Monster Inc. markets personal computer games through a variety of retail outlets. Presently, Monster is faced with a...
Breakdown on excell detail formula written - Monster Inc. markets personal computer games through a variety...
Breakdown on excell detail formula written - Monster Inc. markets personal computer games through a variety of retail outlets. Presently, Monster is faced with a decision as to whether it should obtain the distribution rights to a new technology for personal computer gamers The new game consists of the Daytona 500 game CD, driver seat pad, and control unit with cable (one of each is required per computer to play the game). The retailer’s margin will be 30%. Other data...
A computer company manufactures two types of computers. Each type of computer will require assembly time,...
A computer company manufactures two types of computers. Each type of computer will require assembly time, inspection time, and storage space. The amounts of each of these resources that can be devoted to the production of the computers is limited. The manager wants to determine the quantity of each computer to produce to maximize the profit generated by sales of these computers. In order to develop a suitable model of the problem, the manager has met with design and manufacturing...
3. Bristol Car Service offers airport service in a mid-size city. Bristol charges $34 per trip...
3. Bristol Car Service offers airport service in a mid-size city. Bristol charges $34 per trip to or from the airport. The variable cost for a trip totals $20, for fuel, driver, and so on. The monthly fixed cost for Bristol Rainbow Tours is $3,220. Required: a. How many trips must Bristol sell every month to break even? b. Bristol's owner believes that 240 trips is a reasonable forecast of the average monthly demand. What is the margin of safety...
Inventory Management 1. Ayo is the Purchasing Officer for a company that assembles desktop computers. The...
Inventory Management 1. Ayo is the Purchasing Officer for a company that assembles desktop computers. The computers come with 4 to 6 USB ports. The annual demand for the computers is 600 units. The cost of each computer is $1700, and the inventory carrying cost is estimated to be 10% of the cost of each computer. Ayo has made a study of the costs involved in placing an order and has concluded that the average ordering cost is $50.00 per...
One of Jim O’Brien’s customers, Mid-West Supply, has presented him with an opportunity for a significant...
One of Jim O’Brien’s customers, Mid-West Supply, has presented him with an opportunity for a significant amount of freight moving into a new market for Hardee. Hardee is a truckload carrier primarily moving freight in east/west lanes in the United States, with some movements into Canada. Hardee has dispatch centers located throughout the United States which have some dock and warehousing capacity. The new move would be between Lincoln, NE and Miami, FL. Hardee has avoided this market because of...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT