Armani manufactures a line of ready-to-wear men\'s suits that are distributed to

Question

Armani manufactures a line of ready-to-wear men's suits that are distributed to large, upscale retailers. The line currently consists of three models. The following data are available regarding each model: Model Urbanity Wall Street Esquire Retail Selling Price $175 $450 $1200 Cost to Retailer Armani Variable Cost Demand/Year $75 $45 6,000 $200 $110 4,000 $540 $240 1,500 Armani is considering the addition of a fourth model to its line. This model, the Europa, would retail for $1950 and be sold to retailers for $700. Armani's variable cost of this unit is $280. The demand for the Europa is estimated to be 500 units per year. Eighty percent of the unit sales of the new model is expected to come from other models already being manufactured by Armani (1 percent from Urbanity, 3 percent from Wall Street, and 96 percent from Esquire). Armani will incur a fixed cost of $50,000 to add the new model to the line. Based on the preceding data, should Armani add the Europa to its line of ready-to-wear man's suits? Why or why not?

Explanation / Answer

Solution:

As incremental income is positive, therefore Armani should add the Euopa to its line of ready to wear man suits.

Computation of contribution margin per model Particulars Urbanity Wall Street Esquire Europa Selling price to retailer $75.00 $200.00 $540.00 $700.00 Variable cost per unit $45.00 $110.00 $240.00 $280.00 Contribution margin per unit $30.00 $90.00 $300.00 $420.00

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