Relevant costs: introducing a new product Macready Company is consider¬

ing introducing a new model of personal compact disc players at a price of $105 per unit. Its controller has compiled the following incremental cost in¬ formation based on an estimate of 120,000 units of sales annually for the new product:

Annual inventory carrying costs not included in the variable manufacturing support listed earlier are estimated to be 12% of inventory value. In addition, the sales manager expects the introduction of the new model to result in a reduction in sales of the existing model from 300,000 to 240,000 units. The contribution margin for the old product is $20 per unit.
REQUIRED

(a) Determine the total impact on Macready's profit from the introduction of the new product.

(b) Should Macready introduce the new product? Explain.

(c) Determine the breakeven point (in units) for the new product. That is, deter¬ mine the required sales in units for the company to earn zero profit. Assume that sales of the old product decrease by one unit for every two-unit increase in the sales of the new product.

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Direct materials cost Direct labor cost Variable manufacturing support Sales commission Fixed cost $3,600,000 $2,400,000 $1,200,000 10% of sales $2,000,000 The average inventory levels for the new product are estimated as follows: Raw materials Work in progress (100% complete for materials and 50% complete for labor and variable manufacturing support) Finished goods 2 months of production 1 month of production 2 months of production