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Analyzing the impact of an addition of a new model

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Video Concepts, Inc. (VCD) manufactures a line of DVD records (DVDs) that are distributed to large retailers. The line consists of three models of DVDs. The following data are available regarding the models:
DVD Selling Price Variable Cost Demand/Year
Model Per unit Per unit (units)
Model LX1 $175 $100 2,000
Model LX2 250 125 1,000
Model LX3 300 140 500

VCI is considering the addition of a fourth model to its line of DVDs. This model would be sold to retailers for $375. The variable cost of this unit is $225.the demand for the new model LX4 is estimated to be 300 units per year. Sixty percent of these unit sales of the new model is expected to come from other models already being manufactured by VCI (10 percent from model LX1, 30 percent from Model LX2, and 60 percent from Model LX3). VCI will incur a fixed cost of $20,000 to add the new model in the line. Based on the proceeding data, should VCI add the new Model LX4 to its line of VCRs? Why?

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Solution Summary

Solution analyzes the impact of an addition of a new model on its margins.

Solution Preview

Please refer attached file for better clarity of tables.

Solution:
Let us calculate total contribution margins in first case
Model Selling price per unit,P Variable Cost per unit,V Demand per year,Q Contribution Margin
C=(P-V)*Q
LX1 $175 $100 2000 $150,000
LX2 $250 $125 1000 ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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