Question

1. 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 modes:

            Model            Selling Price            Variable Cost            Demand/Year

                        Per Computer            Per Computer            (Units)

            SX-1            $1,650            $1,000            2,000

            SX-2            $2,400            $1,250            1,000

            SX-3            $2,900            $1,400            500

         Sun Microsystems is considering the addition of a fourth model to its line of mid-size computers. This model, the SX-4 would be sold for $3,500. The variable cost of this unit is $2,550. The demand for the new Model SX4 is estimated to be 600 units per year. Sixty percent of these unit sales of the new model is expected to come from other models already being manufactured by Sun Microsystems (Sixty percent1 from Model SX-1. Ten percent from Model SX-2. Thirty percent from Model SX-3.) Sun Microsystems will incur a fixed cost of $200,000 to add the new Model SX-4 to its product line. The president of Sun Microsystems will only fund projects which show a positive cash flow by the end of the first year of the project. Based on the above data should Sun Microsystems add the new Model SX-4 to its line of mid-size computers? Why? [Show Work]

Answer 1

Anske PageNo unit Contribution m SX-4 = $3,500-$2550 = $450 The Comt ribution mongin of existing model: SX-1 - $ 1650 - $1000 158-1 = $ 650 Sx-a = $ 2400 – $1250 [SX-=$1150 | SX-3 = $2900 - $1400 Sx-3 = 1500] Additional Contribution margin from Qale of sxy i = 600 X$950 – $570000

Pageno@ Total unit sale loss of existing model = 600 X 60% = 360 units Loss of Contribution margin of SX 1 = 360X60% X $650 =$140400 Loss of contribution margin of sx 2 = 360x104. x $1150 = $41400 Loss of contribution margin of sx 3 = 360 X 30%. X$ 1500 = $162000 Total contribution margin lost = $140400 +47400 +$162000 = $343800 .: Additimal fixed cost to add new model = $200,000 Net cash flow by end of 1st year of project = $540,000 - $ 343,800 - $200,000 = $ 26200

Pageno@ Net cash flow = $26200 i Net cash flow ia positive. Hence the sxy should be introduced.