Task 3 (10 marks)

Twyla Company operates a small factory in which it manufactures two products: C and D.

Production and sales results for last year were as follows.

Product C Product D

Units sold 9,000 20,000

Selling price per unit $95 $75

Variable cost per unit $50 $40

Fixed cost per unit $22 $22

For purposes of simplicity, the firm averages total fixed costs over the total number of units of C and

D produced and sold.

The research department has developed a new product (E) as a replacement for product D. Market

studies show that Twyla Company could sell 10,000 units of E next year at a price of $115; the

variable cost per unit of E is $40. The introduction of product E will lead to a 10% increase in

demand for product C and discontinuation of product D. If the company does not introduce the new

product, it expects next years results to be the same as last years.

Required

Should Twyla Company introduce product E next year? Explain why or why not. Show calculations

to support your decision.