Introducing a new product, profitability Santos Company is consi

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.


Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...

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