Task 3 (10 marks) Twyla Company operates a small factory in which it manufacture

Question

Task 3 (10 marks)

Twyla Company operates a small factory in which it manufactures two products: C and D.

Production and sales results for last year were as follows.

Product C Product D

Units sold 9,000 20,000

Selling price per unit $95 $75

Variable cost per unit $50 $40

Fixed cost per unit $22 $22

For purposes of simplicity, the firm averages total fixed costs over the total number of units of C and

D produced and sold.

The research department has developed a new product (E) as a replacement for product D. Market

studies show that Twyla Company could sell 10,000 units of E next year at a price of $115; the

variable cost per unit of E is $40. The introduction of product E will lead to a 10% increase in

demand for product C and discontinuation of product D. If the company does not introduce the new

product, it expects next year’s results to be the same as last year’s.

Required

Should Twyla Company introduce product E next year? Explain why or why not. Show calculations

to support your decision.

Explanation / Answer

C D Sales 9000 20000 855000 1500000 selling price per unit 95 75 variable cost per unit 50 40 450000 800000 contribution 405000 700000 Fixed cost 22 22 198000 440000 EBIT 207000 260000 total Profit 467000 Total sales C Total Sales E Units C Units E C E Sales 9900 10000 940500 1150000 selling price per unit 95 115 variable cost per unit 50 40 495000 400000 contribution 445500 750000 Fixed cost 22 22 217800 220000 EBIT 227700 530000 total profit 757700 Increased Profit 290700 Increased profit from introducing the new product and discontinuing the Product is amount to = 757700 - 467000 290700

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.