Return to Problem 3.35. Kipmar Company’s managers are considering expanding the product line by introducing a  leather briefcase. The new briefcase is expected to sell for $125; variable costs would amount to $75 per  briefcase. If Kipmar introduces the leather briefcase, the company will incur an additional $390,000 per  year in advertising costs. Kipmar’s marketing department has estimated that one new leather briefcase  would be sold for every four molded briefcases.

Data From Problem 3.35:

Kipmar Company produces  a molded briefcase that is distributed to luggage stores. The following operating data for the current year  has been accumulated for planning purposes.

Sales price . . . . . . . . . . . . . . . . . . . . . . . . . . . .          $80.00

Variable cost of goods sold . . . . . . . . . . . . . .            24.00

Variable selling expenses . . . . . . . . . . . . . . . .            21.20

Variable administrative expenses . . . . . . . . .              6.00

Annual fixed expenses  Overhead . . . . . . . . .  $7,800,000

Selling expenses . . . . . . . . . . . . . . . . . . . . . . . .     1,550,000

Administrative expenses . . . . . . . . . . . . . . . . .     3,250,000

Kipmar can produce 1.5 million cases a year. The projected net income for the coming year is expected to  be $1.8 million. Kipmar is subject to a 40% income tax rate.

During the planning sessions, Kipmar’s managers have been reviewing costs and expenses. They  estimate that the company’s variable cost of goods sold will increase 20% in the coming year and that  fixed administrative expenses will increase by $150,000. All other costs and expenses are expected to  remain the same.

Required

a. If managers decide to introduce the new leather briefcase, given the cost changes on the molded briefcase presented in Problem 3.35, how many units of each briefcase would be required to break even in  the coming year? Variable cost of goods sold for the molded briefcase is expected to be $28.80 per unit.

b. After additional research, Kipmar’s marketing manager believes that if the price of the new leather  briefcase drops to $100, it will be more attractive to potential customers. She also believes that at that  price, the additional advertising cost could be cut to $120,000. These changes would result in sales  of one molded briefcase for every three leather briefcases. Based on these circumstances, how many  units of each briefcase would be required to break even in the coming year?

c. What additional factors should Kipmar’s managers consider before deciding to introduce the new  leather briefcase?