Max Leonard, Vice President of Marketing for Dysk Computer, Inc., must decide whether to introduce a mid-priced version of the firm's DC6900 personal computer product line-the DC6900-X computer. The DC6900-X would sell for $3,900, with unit variable costs of $1,800. Projections made by an independent marketing research firm indicate that the DC6900-X would achieve a sales volume of 500,000 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-omega personal computer, which sells for $5,900 (with unit variable costs of $2,200). 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 $1,200). The DC6900-Omega unit volume is expected to be 400,000 units next year, and the DC6900-Alpha is expected to achieve a 600,000-unit sales level. The fixed costs of launching the DC6900-X have been forecast to be $2 million during the first year of commercialization.
Explain why Mr. Leonard should or should not add the DC6900-X model to the line of personal computers?
This solution analyzes the costs and revenues, calculates contribution per unit, and provides the incremental analysis to decide if Mr. Leonard should or should not add the DC6900-X model to the line of personal computers.