Video Concepts, Inc. (VCI) manufactures a line of digital cameras that are distributed to large retailers. The line consists of two models. The following data are available regarding the models:

ModelSelling Price per unit

Variable Cost

per unit

Demand/Year (units)Model LX1$175$1002,000Model LX2$250$1251,000

1. What is the total Gross Profit Margin for VCI based on the data in the table? (HINT: Calculate GPM for each model and add them together.)

Now VCI is considering the addition of the third model to its line (LX3). The model would be sold to retailers for $375. The variable cost of this unit is $225. The demand for the new model LX3 is estimated to be 300 units per year. HOWEVER, with the new model, the original three models will see a reduction in demand. Demand for LX1 will drop 1% and demand for LX2 will drop 5%. VCI will also incur a fixed cost of $20,000 to add the new model to the line. Calculate the following to help with your conclusion.

1. What is the Gross Profit Margin for LX3?
2. What is the Gross Profit Margin for models LX1 and LX2 given reductions in sales from the introduction of LX3? (HINT: First calculate the new/reduced demand for each model once LX3 is introduced. Then calculate the GPM for LX1 and LX2 (using selling price and variable costs which remain unchanged).
3. Finally, make your conclusion about the introduction of LX3. Is it a good idea or not? (HINT: Compare your answer in part A with your answer to Part B + Part C (and dont forget to subtract the fixed costs of adding LX3 to the product line). Is the financial situation better or worse with the introduction of LX3? Show your calculations AND describe your answer in English.