Johnson and Gomez, Inc., is a small firm involved in the production and sale of electronic business
Question:
Johnson and Gomez, Inc., is a small firm involved in the production and sale of electronic business products. The company is well known for its attention to quality and innovation. During the past 15 months, a new product has been under development that allows users improved access to e-mail and video images. Johnson and Gomez code named the product the Wireless Wizard and has been quietly designing two models: Basic and Enhanced. Development costs have amounted to $121,000 and $175,000, respectively. The total market demand for each model is expected to be 40,000 units, and management anticipates being able to obtain the following market shares: Basic, 25 percent; Enhanced, 20 percent. Forecast data follow. Basic Enhanced Projected selling price $ 250 $ 330 Per-unit production costs: Direct material 28 45 Direct labor 15 20 Variable overhead 24 32 Marketing and advertising (fixed but avoidable) 130,000 200,000 Sales commissions* 10% 10% * Computed on the basis of sales dollars.
Since the start of development work on the Wireless Wizard, advances in technology have altered the market somewhat, and management now believes that the company can introduce only one of the two models. Consultants confirmed this fact not too long ago, with Johnson and Gomez paying $23,000 for an in-depth market study. Sales salaries (excluding commission) will be $57,000 no matter which product is sold. The marketing and advertising costs indicated for each product are incurred only if that product is sold. Other fixed overhead is expected to be the same, regardless of which product is introduced. Required: Compute the unit contribution margin for both models.
Which of the data in the table above should be ignored in making the product-introduction decision? For what reason?
What other factors should Johnson and Gomez, Inc., consider before a final decision is made?
Expert Answer:
1 Calculation of Unit Contribution Margin The unit contribution margin is calculated as the selling price per unit minus the variable costs per unit T... View the full answer
