Question

ntos Company is considering introducing a new compact disc player model at a price of $ 105 $105 per unit. Santos Santos​'s controller has compiled the following incremental cost information based on an estimate of 120 comma 000 120,000 units of sales annually for the new​ product: Direct materials cost $ 3,600,000 Direct labor cost $ 2,400,000 Variable manufacturing overhead $ 1,200,000 Sales commission 10% of sales Fixed cost $ 2,000,000 The sales manager expects the introduction of the new model to result in a reduction in sales of the existing model from 300 comma 000 300,000 to 240 comma 000 240,000 units. The contribution margin for the existing model is $ 20 $20 per unit. Requirements ​(a) Determine the total impact on Santos Santos​'s profit from the introduction of the new model. ​(b) Should Santos Santos introduce the new​ model? Explain. Requirement​ (a) Determine the total impact on Santos Santos​'s profit from the introduction of the new model. Begin by determining the contribution margin per unit for the new model. ​(Round amounts to the nearest​ cent.) Fixed cost per unit 2000000 Less: Direct labor cost per unit 2400000 Direct material cost per unit Commission cost per unit Variable overhead cost per unit Contribution margin per unit Now determine the total impact on Santos Santos​'s profit from the introduction of the new model. ​(Use parentheses or a minus sign for a decrease in​ profits.) Increase in contribution margin from new sales Decrease in contribution margin from existing model Increase in fixed costs Increase in profits if the new model is introduced Requirement​ (b) Should Santos Santos introduce the new​ model? Explain. No. Introducing the new product will increase profits by ​$ nothing . Choose from any list or enter any number in the input fields and then continue to the next question.

Answer 1

Calculation of contribution margin from new model:

Selling price per Unit	105
Less: Variable Costs
Direct materials Cost per Unit	30
Direct labor	20
Variable Manufacturing Cost	10
Sales Commission – 10%	10.5
Contribution Margin	$34.5

Contribution Margin from new Model 34.5*120,000 = $4,140,000

Less: Contribution Margin lost from existing model 60,000*20 = $1,200,000

Less: Increase in Fixed Costs = $2,000,000

Increase in Profits from new model = $940,000

b)Since there is incremental profit, Santos SHOULD introduce the new model

Introducing the new product will increase profits by ​$940,000