Question

Tharp Company operates a small factory in which it manufactures two products: C and D. Production and sales results for last year were as follows. Units sold Selling price per unit Variable cost per unit Fixed cost per unit C D 9,100 19,000 $94 $75 47 41 20 20 For purposes of simplicity, the firm averages total fixed costs over the total number of units of Cand D produced and sold. The research department has developed a new product(E) as a replacement for product D. Market studies show that Tharp Company could sell 11,900 units of E next year at a price of $114; the variable cost per unit of E is $45. The introduction of product E will lead to a 11% increase in demand for product Cand discontinuation of product D. If the company does not introduce the new product, it expects next year's results to be the same as last year's. Compute company profit with products C&D and with products C & E. Net profit with products C&D $ 511700 Net profit with products C&E $ Should Tharp Company introduce product E next year?

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

Answer Part 1) Net Profit with C&D = Revenue from C&D - Variable cost of C&D - Fixed cost = ((94*9100)+75*19000))-((47*9100)+(41*19000)) - ((9100+19000)*20) = 2280400-1206700-562000 = $ 511700 Thus the correct answer is $ 511700 Part 2) Net Profit with C &E = Revenue from C&E - Variable cost of C&E - Fixed cost = ((9100*111%"94)+(11900*114))-((9100*111%*47)+(45*11900)) - 562000 = 2306094-1010247-562000 = $ 733847 Thus the correct answer is $ 733847 Part 3) Yes, Product E should be introduced next year, as it leads to increase in net profit