Question 2

Peter Miller, the general manager of Lowell Software, must decide when to release the new version of Lowell's spreadsheet package, Lazyspread 2.0. Development of Lazyspread 2.0 is complete; however, the compact discs and user manuals have not yet been produced. The product can be shipped starting July 1, 2016. The major problem is that Lowell has overstocked the previous version of its spreadsheet package, Lazyspread 1.0. Miller knows that once Lazyspread 2.0 is introduced, Lowell will not be able to sell any more units of Lazyspread 1.0. Rather than just throwing away the inventory of Lazyspread 1.0, Miller is wondering if it might be better to continue to sell Lazyspread 1.0 for the next three months and introduce Lazyspread 2.0 on October 1, 2016, when the inventory of Lazyspread 1.0 will be sold out.

The following information is available:

Lazyspread 1.0 Lazyspread 2.0

Selling price 170 215

Variable cost per unit of compact disc, 25 30

user manuals

Development cost per unit 80 120

Marketing and administrative cost 45 55

Total cost per unit 150 205

Operating income per unit 20 10

per unit

Development cost per unit for each product equals the total costs of developing the software product divided by the anticipated unit sales over the life of the product. Marketing and administrative costs are fixed costs in 2016, incurred to support all marketing and administrative activities of Lowell Software. Marketing and administrative costs are allocated to products based on the budgeted revenues of each product. The preceding unit costs assume Lazyspread 2.0 will be introduced on October 1, 2016.

1.On the basis of financial considerations alone, should Miller introduce Lazyspread 2.0 on July 1, 2016, or wait until October 1, 2016? (30 marks)Show your calculations, clearly identifying and explaining the items that are relevant and irrelevant.

2. What other factors might Peter Miller consider in making a decision? (10 marks)