C12 is a mature product. The sales manager believes that the price of C12 can be raised to $160 per unit with no effect on sales quantity. D57 is a new product introduced last year. Management believes D57 has a great potential and is considering lowering the price to $180 to expand market size and gain market share. The lowering of D57's price is likely to double the total units of D57 sold.

 

			Finished Components
			C12		D57
Requirements for each finished component:
RM1			10	pounds	8	pounds
RM2			0		4	pounds
RM3			2	pounds	1	pound
Direct labor			2	hours	3	hours
Product information:
Sales price			$160		$180
Sales units			12,000		18,000
Estimated beginning inventory (units)			400		150
Desired ending inventory (units)			300		200
			Direct Materials Information
			RM1	RM2	RM3
Cost per pound			$2.00	$2.50	$0.50
Estimated beginning inventory in pounds			3,000	1,500	1,000
Desired ending inventory in pounds			4,000	1,000	1,500

 

			Factory Overhead Information
Variable:
Indirect materials-variable				$10,000
Miscellaneous supplies and tools-variable				$5,000
Indirect labor-variable				$40,000
Maintenance costs-variable				$10,080
Heat, light, and power-variable				$11,000
Payroll taxes and fringe benefits-variable				$250,000
Fixed:
Supervision-fixed				$120,000
Maintenance costs-fixed				$20,000
Depreciation-fixed				$71,330
Heat, light, and power-fixed				$43,420
Total				$580,830
			Selling and Administrative Expense Information
Advertising				$60,000
Sales salaries				$200,000
Travel and entertainment				$60,000
Depreciation-warehouse				$5,000
Office salaries				$60,000
Executive salaries				$250,000
Supplies				$4,000
Depreciation-office				$6,000
Total				$645,000
Income Tax Rate	40%

Required

1. Amend the spreadsheet you constructed in Problem 10-60 to incorporate the changes outlined above. What effect do the changes have on the firm's after-tax operating income?

2. Would you recommend that the firm execute this strategy?