Roland Company operates a small factory in which it manufactures two products: A

Question

Roland Company operates a small factory in which it manufactures two products: A and B. Production and sales result for last year were as follow:
A B
Units sold 8,000 20,000
Selling price per unit 65 52
Variable costs per unit 35 30
Fixed costs per unit 15 15
For purposes of simplicity, the firm allocates total fixed costs over the total number of units of A and B produced and sold.
The research department has developed a new product (C) as a replacement for product B. Market studies show that Roland Company could sell 11,000 units of C next year at a price of $80, the variable costs per unit of C are $29. The introduction of product C will lead to a 10% increase in demand for product A and discontinuation of product B. If the company does not introduce the new product, it expects next year's result to be the same as last year's.

Instructions
Should Roland Company introduce product C next year? Explain why or why not. Show calculations to support your decision.

Explanation / Answer

current policy product A profit =sale -cost =8,000*65 -8,000*35-8,000*15 =$120,000 product B profit =sale -cost =20,000*52-20,000*30-20,000*15=$140,000 total profit =120,000+140,000 =$ 260,000 introducing product C sale of product A will increse by 10 % =8,000+0.1*8000 =8,800 profit product A =8,800*65-8,800*35-8,800*15 =$ 132,000 product C profit =sale -cost =11,000*80 -11,000*29-11,000*15 =$396,000 total profit =$ 528,000 so Roland company should introduce the new product C in the market because net prifit of the company is increasing by a lot of margin.

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