Question

1. Max Leonard, vice president of Marketing for Dysk Computer, Inc must decide whether to introduce a mid-priced version of the firm's DC 6900 personal computer product line - the DC 6900-X. The DC6900-X would sell for $5,000, with unit variable costs of $1,750. Projections made by an independent marketing research firm indicate that the DC6900-X would achieve a sales volume of 50,000 units next year, in its first year of commercialization. One-half of the first year's volume would come from competitors' personal computers and market growth. However, a consumer research study indicates that 30 percent of the DC6900-X sales volume would come from the higher-priced DC6900-0mega personal computer, which sells for $4,000 (with unit variable costs of $2,000). Another 20 percent of the DC6900-X sales volume would come from the economy-priced DC6900-Alpha personal computer, priced at $2,500 (with unit variable costs of$ 1,250). The DC6900-0mega unit volume is expected to be 40,000 units next year, and the DC6900-Alpha is expected to achieve a 60,000-unit sales level. The fixed costs of launching the DC6900-X have been forecast to be $1 million during the first year of commercialization. Should Mr. Leonard add the DC6900-X model to the line of personal computers

Answer 1

Dysk Computer, Inc.

Yes. Mr. Leonard should quickly add the DC6900-X model to the line of personal computers.

Dysk Computers will be making more profits (contribution margin) following the addition of the new model than it would be generating from selling only the DC6900-Omega and Alpha models.

Step-by-step explanation:

a) Data and Calculations:

Contribution without the DC6900-X:

DC6900-0mega DC6900-Alpha Total

Expected sales volume 40,000 60,000

Unit Price $4,000 $2,500

Variable cost per unit $2,000 $1,250

Contribution per unit $2,000 $1,250

Total contribution margin $80 million $75 million $155 million

Less lost contribution $30 million $12.5 million $42.5 million

Net contribution margin from old products = $112.5 million

b) Lost Contribution:

a. DC6900-0mega

30% of 50,000 * $2,000 = $30 million

b. DC6900-Alpha

20% of 50,000 * $1,250 = $12.5 million

Total lost contribution = $42.5 million

c) Sales of DC6900-X:

Expected sales volume 50,000

Unit price $5,000

Variable cost per unit $1,750

Contribution per unit $3,250 ($5,000 - $1,750)

Total contribution margin $162.5 million ($3,250 * 50,000)

Identifiable fixed cost $1.0 million

Net contribution margin $161.5 million

Contribution (old products) $112.5 million

Total new contribution $274.0 million ($161.5 + $112.5 million)

d) If the new product is not launched, Dysk Computers will make $155 million total contribution margin from selling its DC6900-Omega and DC6900-Alpha personal computers. With the launch of DC6900-X, its total contribution margin will skyrocket to $274 million after taking into account the lost sales and contribution of $42.5 million that will result from the launch of this new pc. Should Dysk launch the model? Yes.