Relevant costs, opportunity costs. Larry Miller, the general manager of Basil Software, scheduled a meeting on June 2, 2007, with Nicole Nguyen, sales manager, Andy Ayim, accountant, and Ellen Eisner, software operations manager, to discuss the development and release of Basil Software’s new version of its spreadsheet package, Easyspread 2.0. It is only a question of time before other software firms have a package that matches Easyspread 2.0. Nicole Nguyen, the sales manager, could hardly control her enthusiasm for the new product.

Nicole Nguyen:

Ellen Eisner:

Larry Miller:

Nicole Nguyen:

This product is exactly what the market has been waiting for. We should not delay, by even a single day, the introduction of this product. Let’s make July 1, 2007, the sales release date.

I don’t disagree with Nicole’s assessment of the market potential for this product, but I have a problem. The threatened strike by our printers caused us to purchase large quantities of user’s manuals for Easyspread 1.0. We don’t like to store the manuals separately, so we also got extra diskettes duplicated.

The manuals and diskettes were then packaged and shrink-wrapped. We are currently holding 60,000 completed packages, which equals the expected sales for July, August, and September 2007 of Easyspread 1.0. I think we should make October 1, 2007, the expected release date of Easyspread 2.0.

This date would enable us to sell all of our inventory of Easyspread 1.0.

Nicole, do you see any problem with Ellen’s suggestion? Our inventory of Easyspread 1.0 seems rather large for us to ignore. If we introduce Easyspread 2.0 onJuly 1, what would we do with the inventory ofEasyspread 1.0 that we currently hold?

We currendy sell Easyspread 1.0 to our wholesalers and distributors for

$203.50 each. The additional optimization features in Easyspread 2.0 DECISION MAKING AND mean that we should be able to sell Easyspread 2.0 to our distributors for about $203.50. We should not ignore the higher profit margins from Easyspread 2.0. It is true, though, that each time we sell one unit ofEasyspread 2.0, we forgo the sale of one unit ofEasyspread 1.0. Since the expected demand for Easyspread 2.0 is at least as large as the demand for Easyspread 1.0, we may have to throw away the existing inventory ofEasyspread 1.0 once we introduce Easyspread 2.0.
Larry Miller: Andy, you’ve heard what Nicole and Ellen have to say. I would like you to do a detailed analysis of the alternatives, and let me know within a week what you come up with. We need to make a decision on this one way or another, and we need to do so soon.
' ' *0 When Andy Ayim returned to his office, he pulled out the cost records he had developed for Easyspread 1.0 and Easyspread 2.0. The unit costs for the two products could be summarized as follows:
Easyspread 1.0 Easyspread 2.0 Manuals, diskettes S 22.00 $ 27.50 Development costs 82.50 115.50 Alarketing and administration costs 27.50 33.00 Total cost per unit $132.00 $176.00 The following additional facts are available:

a. Basil contracts widi outside vendors to print manuals and duplicate diskettes.

b. Development costs are allocated on the basis of the total costs of developing the software and the anticipated unit sales over the life of the software.

c. Marketing and administration costs are fixed costs in 2007, incurred to support all activi¬
ties ofBasil Software. Marketing and administration costs are allocated to products on the basis of the budgeted revenues from each of the prodticts. The preceding unit costs assume Easyspread 2.0 will be introduced on July 1, 2007.
Instructions Form groups of three students to complete the following requirements. To answer require¬
ment 2, each student should play the role of one of Larry Miller, Nicole Nguyen, and Ellen Eisner.
Required 1. Based on financial considerations only, is Basil Software better off introducing Easyspread 2.0 immediately or waiting? Explain your conclusion, clearly identifying relevant and irrele¬
vant costs.
2. What other factors might Nicole Nguyen and Ellen Eisner raise? What factors might Larry Miller consider important?