AISHM ENERGY (AE) Inc, is Islamabad based firm specializing in the energy efficient products especially engines for Vehicles and Aircrafts. The company's CEO has been personally overlooking a project code named Go Efficient. Under the project, their company is designing two models of electric motors to be fitted with gasoline engines to convert them into a hybrid one. Their focus is on engine sizes of 660 cc to 1300 cc. These motors have been named as Regular and Advanced. The regular model is based on Nikel ion battery pack while advanced model is based on Alkalin ion based battery supported with regenerative braking power. Development costs have amounted to $121,000 and $175,000, respectively. The total market demand for each model is expected to be 40,000 units, and management anticipates being able to obtain the following market shares: Regular, 25 percent; Advanced, 20 percent. Forecasted data follow.

Regular

Advanced

Projected selling price ..............................

$ 250

$ 330

Per-unit production costs: Direct material .......

28

45

Direct labor .......................................

15

20

Variable overhead ..............................

24

32

Marketing and advertising ....................

130,000

200,000

Sales salaries .......................

57,000

57,000

Sales commissions* ...................

10%

10%

*Computed on the basis of sales dollars.

Since the start of development work on the electric motors, advances in technology have altered the market somewhat, and management now believes that the company can introduce only one of the two models. Consultants confirmed this fact not too long ago, with AISHM ENERYGY paying $23,000 for an in-depth market study. The total fixed overhead is expected to be the same, regardless of which product is manufactured.

Required:

1.Compute the per-unit contribution margin for both models.

2.Which of the data in the table above should be ignored in making the product-introduction decision? For what reason?

3.Make a financial analysis and determine which of the two models should be introduced.

4.What other factors should AISHM ENERGY, Inc. consider before a final decision is made?