Johnson and Gomez, Inc. is a small firm involved in the production and sale of e
ID: 2595362 • 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 $207,000 and $288,000, respectively. The total market demand for each model is expected to be 57,000 units, and management anticipates being able to obtain the following market shares: Basic, 25 percent; Enhanced, 20 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 $36,200 for an in-depth market study. Sales salaries (excluding commission) will be $94,000 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.
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?
Basic Enhanced Projected selling price $ 430.00 $ 530.00 Per-unit production costs: Direct material 59.00 93.00 Direct labor 31.00 47.00 Variable overhead 53.00 65.00 Marketing and advertising (fixed but avoidable) 212,000 385,000 Sales commissions* 15 % 15 %Explanation / Answer
Per Unit Basic Per Unit Enhanced Total Market demand 57000 57000 Market share 25% 20% sales units 14250 11400 Sales Revenue 430 24510000 530 30210000 Less : Total costs Direct materials 59 3363000 93 5301000 Direct labor 31 1767000 47 2679000 Variable Overheads 53 3021000 65 3705000 Marketing & advertising fixed but avoidable 212000 385000 Sales commissions 64.5 3676500 79.5 4531500 Total costs 12039500 16601500 Net Income 12470500 13608500 Since Net Income is higher in case of Enhanced Model, The company should go for it. Development costs and market study expenses are historical costs, hence are not relevent. Sales salaries is irrelevent as it does not changes given an option to change the decision.
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