Berry Company is a manufacturer of precision sensing equipment. J. Adams, a project engineer, has developed a prototype of an automatic testing kit that continually evaluates water quality and chemical content in hot tubs. Adams believes the kit will permit domestic tub owners to control water quality better at reduced costs and with less time invested. Management is convinced the kit will have strong market acceptance. The new equipment uses the same technology that the company uses on other equipment, so existing facilities can be used to produce the product.
Adams, who is ready to proceed with developing cost and profit plans for the testing kit, asked the Marketing Department to develop a suggested selling price and estimate the sales volume. The Marketing Department contracted with Statico, a marketing research company, to develop price and volume estimates.
Based on an analysis of the market, Statico considered unit prices between $80 and $120. Within this price range, it recommended a price of $100 per kit. The frequency distribution of expected unit sales volume at this selling price is as follows:
Annual Unit Sales Volume Probability
50,000 ................................ .25
60,000 ................................. .45
70,000 ................................. .20
80,000 ................................ .10
1.00
The Profit Planning Department accumulated cost data that Adams had requested. The new product will require direct materials costing $25 per unit and will require 2 hours of direct labor to manufacture. The company is currently in contract negotiations with its union, so projections of labor costs are difficult. The current direct labor cost is $8 per hour. Representatives of management who are negotiating with the union have estimated the possible settlements and related probabilities that follow:

The company applies factory overhead to its products using a plant-wide rate of $15 per direct labor hour. This rate is based on a planned activity level of 900,000 direct labor hours, which represents 75% of practical capacity. The budgeted factory overhead costs for the current year follow:

The introduction of the new product will require some changes in the manufacturing plant. Although the plant is below capacity and current facilities can be used, a new production line requiring a new supervisor would need to be opened. The annual cost of a supervisor is $28,000. In addition, one piece of equipment that the company does not own would need to be obtained under an operating lease at an annual cost of $150,000.
The company has already paid Statico $132,000 for the marketing study that was mentioned previously. Statico has agreed to conduct the promotion and distribution of the new product for a free of $6 per unit once the product is introduced.
Required:
(1) Determine the annual pretax advantage or disadvantage of introducing the new product using a deterministic approach (i.e., use only the single most likely events in your analysis).
(2) Determine the annual pretax advantage or disadvantage of introducing the new product using an expected value approach (i.e., incorporate probability distributions in your analysis).
(3) Describe how the company can use the data presented to develop a simulation model that could be used for decision making.

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Direct Labor Cost per Hour $8.50 8.80 9.00 Probability .30 .20 1.00 Budgeted Cost Cost per Direct Labor Hour Variable overhead: Suppliesnn.nm Materials handling 360,000 315,000 $ 40 .35 1.25 Heat, light, and power1,125,000 Fixed overhead: Supervisory salaries...r 1,440,000 Building depreciation.4,410,000 Machinery depreciation 3,420,000 2430,000 Total budgeted costs...$13,500000 1.60 4.90 3.80 2.70