Twyla Company operates a small factory in which it manufactures two products: C
ID: 2503588 • Letter: T
Question
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.
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 11,380 units of E next year at a price of $115; the variable cost per unit of E is $43. The introduction of product E will lead to a 11% increase in demand for product C and discontinuation of product D. If the company does not introduce the new product, it expects next year
Explanation / Answer
a) This year profit with product C & D :
Product c total cost = 49+20= 69 dollar
Product C profit per unit = 94-69 = 25 dollar
Product c profit = 25*9000 = 225000 dollar
Similarly product d profit = (77-(40+20))*19790 = 336430 dollar
Total profit = 561430 dollar
b) Now to calculate new fixed cost, first we identify total fixed cost this year = (9000+19790)*20 = 575800 dollar
Number of E units sold (given) = 11380
Number of C products sold = 9000*(1+0.11) = 9990 dollar
Fixed cost per unit = 575800/(11380+9990) = 26.94 dollar
Profit from Product C = (94- (49 + 26.94))*9990 = 180419.4 dollar
Profit from product E = (115- (43+26.94))*11380 = 512782.8 dollar
Total profit = 693202.2 dollar
Profit has increased from past year.
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