Problem 19.38

EBP Ltd 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 handheld access to e-mail and video images. EBP names the product Wireless Wizard and has been quietly designing two models: Standard and Enhanced. Development costs have amounted to $181 500 and $262 500, respectively. The total market demand for each model is expected to be 40 000 units and management anticipate being able to obtain the following market shares: Standard, 25 percent; Enhanced, 20 percent. Forecast data follow:

Standard

Enhanced

Projected selling price

$375.00

$495.00

Production cost per unit:

Direct material

42.00

67.50

Direct labor

22.50

30.00

Variable overhead

36.00

48.00

Fixed overhead

54.00

72.00

Marketing and advertising per product line

195 000

300 000

Sales salaries per product line

85 500

85 500

Sales commissions*

10%

10%

*Calculated based on sales dollars

Since the start o development work on the Wireless Wizard, advances in technology have altered the market somewhat and management now believe that the company can introduced only one of the two models. Consultants confirmed this fact not too long ago with EBP paying $34 500 for an in depth market study.

Required:

1.Calculate the per unit contribution margin for both models.

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

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

4.What other factors should EBP consider before a final decision is made?