3. Morningstar Computer, is a manufacturer of mid-size computers, which are primarily used by medium and small
Question:
3. Morningstar Computer, is a manufacturer of mid-size computers, which are primarily used by medium and small businesses. Morningstar product line currently consists of three models of mid-size computers. The following data are available regarding the models:
Model Selling Price Variable Cost Demand/Year
Per Computer Per Computer (Units)
MS-1 $1,000 $800 2,000
MS-2 $2,000 $1,200 1,000
MS-3 $2,400 $1,400 700
Morningstar is considering the addition of a fourth model to its line of mid-size computers.
This model, the LX-4 would be sold for $3,000.
The variable cost of this unit is the last 3 digits of your Banner ID $215
The demand for the new Model LX-4 is estimated to be 500 units per year.
40% of the new models unit sales are expected to come from the existing three models already being manufactured by Morningstar.
10% of the cannibalized amount from Model MS-1,
30% of the cannibalized amount from Model MS-2,
60% of the cannibalized amount from Model MS-3.
Morningstar Computer will incur a fixed cost of $300,000 to add the new model LX-4 to its product line.
The president of Morningstar will only fund projects which show a positive cash flow by the end of the first year of the project
Questions:
1) What is the unit cannibalization from each of the 3 original products after LX-4 model is launced
2) What is unit contribution for LX-4
3) Based on your data above should Morningstar add the new Model LX-4 and why?