Question

4. Beats by Dre (Beats) manufacturers a line of headphones that are distributed to large retailers. The line consists of three models of headphones. The following data are available regarding the models: Model Variable Cost per Unit Demand/Year (units) Beats EP Beats Solo Beats Studio DVD Selling Price Per Unit $175 250 300 $100 125 140 2,000 1,000 500 Beats is considering the addition of a fourth model, the Beats Pro, to its line of headphones. This model would be sold to retailers for $375. The variable costs of this unit is $225. The demand for the new Beats Pro model is estimated to be 300 per year. Sixty percent of the unit sales of the new model is expected to come from the other models already being manufactured by Beats: 10 percent from the Beats EP, 30 percent from the Beats Solo, and 60 percent from the Beats Studio. Beats will incur a fixed costs of $20,000 to add the Beats Pro model to the line. Based on the preceding data, should Beats add the new Beats Pro to its line of headphones? Why?

Answer 1

Firstly we have to calculate contribution margin loss from the loss of three products

= beats EP + beats polo + beats Studio

= (300×60%×10%×(175-100)) + (300×60%×30%(250-125)) + (300×60%×60%×(300-140))

= $ 25380

Net benefit from new beats Pro

= contribution margin from new beats pro - loss of contribution margin - fixed cost

= (300×(375-225)) - 25380 - 20000

= - $ 380

Thus the loss of contribution margin $ 380

The beats should not add the new beats pro to its line of headphones because it leads to loss of $ 380