Introducing a new product, profitability Santos Company is considering introducing a new compact disc player model at a price of $105 per unit. Santos’s controller has compiled the following incremental cost information based on an estimate of 120,000 units of sales annually for the new product:

Direct materials cost........... $3,600,000

Direct labor cost............... $2,400,000

Variable manufacturing overhead...... $1,200,000

Sales commission............. 10% of sales

Fixed cost................ $2,000,000

The sales manager expects the introduction of the new model to result in a reduction in sales of the existing model from 300,000 to 240,000 units. The contribution margin for the existing model is $20 per unit.

Required

(a) Determine the total impact on Santos’s profit from the introduction of the new model.

(b) Should Santos introduce the new model? Explain.