Elise Surgical Products Company produces diverse lines of surgical instruments. It is considering a proposal suggested by one of its sales managers, to produce dissection instrument sets for use by medical and premedical students. There is little competition in the market for the instrument sets, and the firm's present sales force can be used for effective distribution coverage. Moreover, the sales manager believes that the company can produce the instruments with the present facilities, except for the addition of certain minor auxiliary equipment.
Management assigned two members of its Sales Department, two from the Production Department, and an accounting staff representative to analyze the proposal. The team has assembled the following information.
(a) The proposed dissection instrument sets include the following:

(b) The market price for such sets ranges from $55 to $65. An estimate of the total annual market demand ranges between 5,000 and 7,000 sets, and the company expects to sell 2,000 sets at $60.
(c) Set components can be purchased from suppliers at the following price per unit:

(d) The company has the option of manufacturing all the components except glass slides, cover slips, and cases. Components are grouped into two categories: Group I-dissec¬tion knives and scalpels, and Group II-scissors, tweezers, and clamps.
(e) Production costs were analyzed to be as follows:

(f) Set assembly and packing costs will average $3 per set.
(g) Additional fixed factory overhead directly related to the sets will be $7,040 and $6,000 annually for Groups I and II, respectively.
(h) The new product will be allocated the following amounts of the presently existing annual fixed overhead:

(i) All sales are FOB the instruments factory.
Required:
Advise management on the desirability of the proposal, including supporting computations. Compute unit costs to one tenth of one cent.

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Quantity per Set Dissection knives Scissors . TweezerS Scalpels ..tar.. Clamps 3 2 2 2 4 100 400 Glass slides. Cover slips.. Case Dissection knives . Scissors.... Tweezers ………… Scalpels .. Clamps Glass slides n Cover slips Case.. $3.20 3.00 2.97 3.30 3.28 .03 .01 6.00 Group 1 lb. of steel for 25 units at $3.27 per lb. 2.5 hrs. for 25 units at $9.48 per hr. 150% of labor cost Group II Materials.... Labor... Variable factory overhead 1 lb of steel for 20 units at $3.60 per Ib. 2 hrs. for 20 units at $12.16 per hr 150% of labor cost Group I manufacturing Group II manufacturing All other dissection sets' production activity $4,000 6,000 7,000