Layton Company operates a small factory in which it manufactures two prod- ucts:
ID: 2565265 • Letter: L
Question
Layton Company operates a small factory in which it manufactures two prod- ucts: C and D. Production and sales results for last year were as follows: Units sold Selling price per unit Variable costs per unit Fixed costs per unit 4,000 10,000 $80 50 $100 48 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 Layton Company could sell 5,500 units of E next year at a price of $150; the variable costs per unit of E are $64. The introduction of prod- uct E will lead to a 10% increase in demand for product C and discontinuation of prod- uct D. If the company does not introduce the new product, it expects next year's results to be the same as last year's. Instructions Should Layton Company introduce product E next year? Explain why or why not. Show calculations to support your decision. (CMA-Canada adapted)Explanation / Answer
In this question, what we will do is that we will calculate the net income earned by the company each year. If the company has earned more profit in the previous year, then it would be better that the new Product E must not be introduced and in case, the company earns more profit from the introduction of Product E, then it would be better for the company to introduce Product E.
The following table shows the net income earned by the company before Product E is introduced:
Current scenario
Particulars
Product C
Product D
Formula used
Units sold
4,000.00
10,000.00
Sales
4,00,000.00
8,00,000.00
(4000*100)
(10000*80)
Formula used is: number of units sold*selling price per unit
Less: variable costs
1,92,000.00
5,00,000.00
(4000*48)
(10000*50)
Formula used is: number of units sold*variable cost per unit
Contribution
2,08,000.00
3,00,000.00
Less: fixed costs
88,000.00
2,20,000.00
(4000*22)
(10000*22)
Formula used is: number of units sold*fixed cost per unit
Net income
1,20,000.00
80,000.00
The total of the above net income =$(120,000+80,000)=$200,000
The following table shows the net income earned by the company after Product E is introduced:
After a year scenario
Particulars
Product C
Product D
Formula used
Units sold
4,400.00
5,500.00
Sales
4,40,000.00
8,25,000.00
(4400*100)
(5500*150)
Formula used is: number of units sold*selling price per unit
Less: variable costs
2,11,200.00
3,52,000.00
(4400*48)
(5500*64)
Formula used is: number of units sold*variable cost per unit
Contribution
2,28,800.00
4,73,000.00
Less: fixed costs
96,800.00
1,21,000.00
(4400*22)
(5500*22)
Formula used is: number of units sold*fixed cost per unit
Net income
1,32,000.00
3,52,000.00
The total of the above net income =$(132,000+352,000)=$484,000
The following formulae have been used:
Explanation: Now, before the introduction of Product E, the company earned a net income of $200,000 but after this Product is introduced, the company had earned $484,000.
Hence, since the company earned more net income after the introduction of Product E, it would be better to introduce Product E and discontinue the Product D.
Current scenario
Particulars
Product C
Product D
Formula used
Units sold
4,000.00
10,000.00
Sales
4,00,000.00
8,00,000.00
(4000*100)
(10000*80)
Formula used is: number of units sold*selling price per unit
Less: variable costs
1,92,000.00
5,00,000.00
(4000*48)
(10000*50)
Formula used is: number of units sold*variable cost per unit
Contribution
2,08,000.00
3,00,000.00
Less: fixed costs
88,000.00
2,20,000.00
(4000*22)
(10000*22)
Formula used is: number of units sold*fixed cost per unit
Net income
1,20,000.00
80,000.00
The total of the above net income =$(120,000+80,000)=$200,000
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