Problem 14-46 Introducing a New Product (LO 14-4, 14-5)

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Johnson and Gomez, Inc. is a small firm involved in the production and sale of electronic business products. The company is well known for its attention to quality and innovation.

During the past 15 months, a new product has been under development that allows users improved access to e-mail and video images. Johnson and Gomez code named the product the Wireless Wizard and has been quietly designing two models: Basic and Enhanced. Development costs have amounted to $198,000 and $279,000, respectively. The total market demand for each model is expected to be 51,000 units, and management anticipates being able to obtain the following market shares: Basic, 25 percent; Enhanced, 20 percent. Forecasted data follow.

	Basic				Enhanced
Projected selling price	$	400.00			$	500.00
Per-unit production costs:
Direct material		53.00				84.00
Direct labor		28.00				41.00
Variable overhead		47.00				59.00
Marketing and advertising (fixed but avoidable)		206,000				355,000
Sales commissions*		15	%			20	%

*Computed on the basis of sales dollars.

Since the start of development work on the Wireless Wizard, 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 Johnson and Gomez paying $35,600 for an in-depth market study. Sales salaries (excluding commission) will be $91,000 no matter which product is sold. The marketing and advertising costs indicated for each product are incurred only if that product is sold. Other fixed overhead is expected to be the same, regardless of which product is introduced.

Problem 14-46 Part 3

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

4. What other factors should Johnson and Gomez, Inc. consider before a final decision is made?

Req 3A Req 3B Prepare a financial analysis and determine which of the two models should be introduced. (Round intermediate calculations to 2 decimal places.) Basic Enhanced Total contribution margin Less: Marketing and advertising Income 206,000 355,000 $ (206,000) $ (355,000)