Johnson and Gomez, Inc. is a small firm involved in the production and sale of e
ID: 2594147 • Letter: J
Question
Johnson and Gomez, Inc. is a small firm involved in the production and sale of electronic business products. The company is well known for its attention to quality and innovation.
During the past 15 months, a new product has been under development that allows users improved access to e-mail and video images. Johnson and Gomez code named the product the Wireless Wizard and has been quietly designing two models: Basic and Enhanced. Development costs have amounted to $186,000 and $267,000, respectively. The total market demand for each model is expected to be 43,000 units, and management anticipates being able to obtain the following market shares: Basic, 30 percent; Enhanced, 25 percent. Forecasted data follow.
*Computed on the basis of sales dollars.
Since the start of development work on the Wireless Wizard, advances in technology have altered the market somewhat, and management now believes that the company can introduce only one of the two models. Consultants confirmed this fact not too long ago, with Johnson and Gomez paying $34,800 for an in-depth market study. Sales salaries (excluding commission) will be $87,000 no matter which product is sold. The marketing and advertising costs indicated for each product are incurred only if that product is sold. Other fixed overhead is expected to be the same, regardless of which product is introduced.
Compute the unit contribution margin for both models. (Round your answers to 2 decimal places.)
Which of the following should be ignored in making the product-introduction decision? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)
Development costsunanswered
Market studyunanswered
Marketing and Advertisingunanswered
Fixed manufacturing overheadunanswered
Variable manufacturing overheadunanswered
Sales salariesunanswered
3-a. Prepare a financial analysis and determine which of the two models should be introduced.
3-b. The company would be advised to select the Enhanced model or Basic model?
What other factors should Johnson and Gomez, Inc. consider before a final decision is made? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)
Possibility of merger of the firm with a bigger playerunanswered
Growth potential of the Basic and Enhanced modelsunanswered
Competitive products in the marketplaceunanswered
Aesthetic differences between the two productsunanswered
Break-even pointsunanswered
Data validityunanswered
Previous years' sales trendsunanswered
Production feasibilityunanswered
Effects, if any, on existing product sales
Basic Enhanced Projected selling price $ 360.00 $ 460.00 Per-unit production costs: Direct material 45.00 72.00 Direct labor 24.00 33.00 Variable overhead 39.00 51.00 Marketing and advertising (fixed but avoidable) 198,000 315,000 Sales commissions* 15 % 20 %Explanation / Answer
1. Calculation of Contribution Margin per unit
Contribution margin
Particulars
Basic
Enhanced
Selling Price
360
460
Less: Commission Sales
(54)
(92)
Net Selling Price
306
368
Less: Variable Cost
Materials
(45)
(72)
Labor
(24)
(33)
Variable Overheads
(39)
(51)
Contribution Margin
198
212
2. Costs to be ignored when taking product decision are:
1. Development costs - This cost should be ignored as it has already been incurred and is sunk cost. This cost is not dependent on product introduction decision.
2. Market Study - This cost has also been incurred in past and is therefore irrelevant for future decision making. It is a sunk cost.
3. Marketing and Advertising - These costs are fixed but are avoidable if product is not manufactured and therefore should not be ignored.
4. Fixed manufacturing overheads - these overheads are required to be incurred at same level and is therefore independent of the product decision. Therefore, these overheads should be ignored.
5. Variable manufactured - Variable overheads are also required to be included for decision making. These cannot be ignored.
6. Sales Salaries - Sales salaries should be ignored as they are bound to be incurred. These should be ognored.
3. Preparation of Financial Analysis
Preparation of Financial Analysis
Particulars
Basic
Enhanced
Units to be sold
43,000 x 30% = 12,900
43,000 x 25% = 10,750
Selling Price
360
460
Less: Commission Sales
(54)
(92)
Net Selling Price
306
368
Less: Variable Cost
Materials
(45)
(72)
Labor
(24)
(33)
Variable Overheads
(39)
(51)
Contribution Margin
198
212
Total contribution margin
2,554,200
2,279,000
Less: Marketing & Advertising
(198,000)
(315,000)
Operating Profit
2,356,200
1,964,000
3B. Since relevant operating profits will be higher in Basic model, the same should be select Basic model.
Particulars
Basic
Enhanced
Selling Price
360
460
Less: Commission Sales
(54)
(92)
Net Selling Price
306
368
Less: Variable Cost
Materials
(45)
(72)
Labor
(24)
(33)
Variable Overheads
(39)
(51)
Contribution Margin
198
212
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.