Part I:

Xelon Corporation is a small technology company that currently has a single product that they build in their own manufacturing plant, the X200 wireless router. The X200 is marketed extensively through magazine advertising, which costs the company $1,250,000 per year. The X200 is currently sold only through a network of distributors who then sell to retailers. The retail price is $90. Retailers take a margin of 20%, and the retail distributor takes a margin of 25%. Xelons manufacturing plant costs $1,750,000 per year to run, regardless of the volume of production. Each X200 requires $16 per unit for basic materials and $5 for complex materials. Also, each unit takes 5 minutes of a workers time and 3 minutes of a diagnostic machines time to inspect for quality control. The diagnostic machine costs $100/hour to run, and workers are paid $12/hour. One of the chips used in the manufacture of the unit requires a licensing fee to the chip manufacturer of $7/unit.

1. What is Xelons contribution per unit?
2. Last year, Xelon sold 800,000 units. How much profit are they making in total?
3. If Xelons original plant cost $30,000,000 to build, and the depreciation life of the plant is 20 years, what is Xelons break even volume for the X200 in the retail channel? Use accounting BE.

Part II:

In August 2020, Xelon launched the Q100, which is a stripped-down version of their original product that cost the company $1,000,000 to develop. The new Q100 is sold directly to consumers for $60 over the Internet. The Q100 costs Xelon $35 to manufacture, and each unit costs $10 in shipping costs when it is mailed to consumers. The Q100 is supported by a limited banner-ad advertising budget of $300,000 per year. The Q100 is produced on the same line as the X200, and other than the advertising budget, there are no additional costs associated with producing the new product. After introducing the Q100, Xelons management conducted a market research study. The study revealed that the Q100 is selling 225,000 units per year, and that 35% of those who purchased a Q100 would have purchased a X200 if the Q100 was not available.

4. Xelon is selling both products in the market. What is the incremental profit or loss associated with the Q100 product as part of the product line (that is what is the incremental profit of Xelon Corp. due to the introduction of the Q100 product)?

Part III:

It turns out that, in addition to the products that they offer, Xelon also offers a service contract to their customers, many of whom are businesses. The service contract costs consumers $12 per year, and is paid at the time of purchase and on the anniversary of the purchase date in future years. At the time they purchase a product (either the X200 or the Q100), 75% of customers buy the service plan. Every year, 25% of the customers who have a plan do not renew their plan. Both products have an average product life of 5 years. The cost to provide service to those who have a service plan is $5 per year. Use the non-discounted version of LTVC (that is, ignore the time value of money). Ignore cannibalization effects for this problem.

5. What is the average lifetime value of a customer who purchases a Q100?