Straus Company operates a small factory in which it manufactures two products:

A and B. Production and sales results for last year were as follows:

For purposes of simplicity, the firm averages total fixed costs over the total number of units of A and B produced and sold.

The research department has developed a new product (C) as a replacement for product B. Market studies show that Straus Company could sell 11,000 units of C next year at a price of $120; the variable costs per unit of C are $42. The introduction of product C will lead to a 10% increase in demand for product A and discontinuation of product B.

If the company does not introduce the new product, it expects next year’s results to be the same as last year’s.

Instructions

Should Straus Company introduce product C next year? Explain why or why not. Show calculations to support your decision.

(CMA-Canada adapted)

Transcribed Image Text:

Units sold Selling price per unit Variable costs per unit Fixed costs per unit 8,000 $95 50 20,000 $78 45