Mary Williams, owner of Williams Products, is evaluating whether to introduce a new product line. After thinking through the production process and the costs of raw materials and new equipment, Williams estimates the variable costs of each unit produced and sold at $6 and the fixed costs per year at $60,000.
- If the selling price is set at $18 each, how many unit must be produced and sold for Williams to break even? Use both graphic and algebraic approaches to get your answer.
- Williams
forecasts sales of 10,000 units for the first year if the selling price is set at $14 each. What would be the total contribution to profits from this new product during the first year? - If the selling price is set at $12.50, Williams forecasts that first-year sales would increase to 15,000 units. Which pricing strategy ($14.00 or $12.50) would result in the greater total contribution to profits?
- What oilier considerations would be crucial to the final decision about making and marketing the new product?
a.
To calculate: The break even quantity using both graphic and algebraic approaches.
Concept Introduction: Break-even point is explained as a point where a company is earning no profits and incurring no losses reflecting that total cost is equivalent to total income.
Explanation of Solution
Given information:
Variable costs: $6 per unit
Fixed costs: $60,000
Selling price: $18 per unit
Break-even quantity: ?
Calculation of break even quantity:
Hence, the break even quantity is 5,000 units.
Graphic approach for calculating break even quantity:
Fig (1)
b.
To calculate: The total contribution to profits from this new product.
Concept Introduction: Profit is explained as surplus of total income over total costs.
Explanation of Solution
Given information:
Forecasted sales: 10,000 units
Selling price: $14 per unit
Calculation of total contribution to the profits:
Therefore, the total contribution from the new product is $20,000.
c.
To calculate: The total contribution to profits from this new product if selling price is $12.50.
Concept Introduction: Profit is explained as surplus of total income over total costs.
Explanation of Solution
Given information:
Forecasted sales: 15,000 units
Selling price: $12.50 per unit
Calculation of total contribution to the profits:
Therefore, the total contribution from the new product is $37,500.
If selling price is $14 and forecasted sales are 15,000 units, then,
Calculation of total contribution to the profits:
It can be concluded that when selling price is $14 then it can get a greater total contribution to Company W.
d.
To identify: The other considerations that would be crucial for final decision making for the new product.
Concept Introduction: Decision making is a process in which members of an organization select a particular course of action in response to both problem and opportunity. The objective of decision making is to gain a maximum and profitable result.
Explanation of Solution
Other considerations that would be crucial for final decision making of new product are:
- Company W can identify and evidently state the problems.
- Various other alternatives should be evaluated and for the same information should be collected.
Decisions are taken by organizations on the basis these procedures that are generally performed: break even analysis, decision tree, preference matrix and preference decision tree.
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