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?