Question

Problem 14-46 Introducing a New Product (LO 14-4, 14-5) [The following information applies to the questions displayed below.) 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 $198,000 and $279.000. respectively. The total market demand for each model is expected to be 51.000 units, and management anticipates being able to obtain the following market shares: Basic, 25 percent Enhanced, 20 percent. Forecasted data follow. Basic $ 400.00 Enhanced $ 0. Projected selling price Per-unit production costs: Direct material Direct labor Variable overhead Marketing and advertising (fixed but avoidable) Sales commissions 53.00 29.00 447.00 206,000 84.00 41.00 59.00 355,000 23% *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 535,600 for an in-depth market study, Sales salanes. (excluding commission will be $91.000 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 nroduct is introduced

Answer 1

Ques 1	Basic			Enhanced
Selling price		$              400.00			$ 500.00
Less: Variable costs:
Direct material	$                53.00			$     84.00
Direct labour	$                28.00			$     41.00
Variable manufacturing overhead	$                47.00			$     59.00
Sales commission
$400* 15%; $500 *20%	$                60.00			$ 100.00
Total unit variable cost		$              188.00			$ 284.00
Unit contribution margin		$              212.00			$ 216.00
Ques 2
• Development costs—sunk • Fixed manufacturing overhead—will be incurred regardless of which product is selected • Sales salaries—identical for both products • Market study—sunk
Ques 3
	Basic	Enhanced
Expects to sell	12,750	10,200
(51000*25% ; 51000*20%)
First answer part b to answer part a
	Basic	Enhanced
Total contribution margin:
12,750 units * $212; 10,200 units * $216	$        2,703,000	$        2,203,200
Less: Marketing and advertising	$           206,000	$           355,000
Profit	$        2,497,000	$        1,848,200
the company is advised to select	Basic	Model
Ques 4
• competitive products in the marketplace • data validity • growth potential of the Basic and Enhanced models • production feasibility • effects, if any, on existing product sales • break-even points.