2.Your company is planning on introducing a new residential smoke detector at th

Question

2.Your company is planning on introducing a new residential smoke detector at the start of next year. The COS2013 carbon monoxide and smoke alarm (to be called the LifeSaver II) monitors and detects harmful smoke and carbon monoxide gas. It measures the concentration of CO or smoke and sounds a loud alarm pattern when a potentially harmful level is reached. The alarm is designed to detect both fast burning and slow smoldering fires. The type of alarm is visibly indicated by an alarm icon. The new model is a 120 volt hardwire combination smoke and carbon monoxide alarm, using the latest ionization, photoelectric and semiconductor technology. Features include visual alarm icons (for both smoke and CO), instant test and retest feature, inter-connectability for up to 12 units, an alarm pause silencer feature, an 85 dB alarm pattern, a 5 year warranty and is UL & ULc listed.

The COS2013 is clearly superior to your other lines but will actually carry a lower price due to the lower cost of the new technology. Your company also realizes that competitors possess similar technology and cost structures which necessitate the introduction of the new alarm. Your company will continue to sell its current product: the LifeSaver I. Your boss has asked you to assess the impact of cannibalization on the company's projected total contribution margin.

The LifeSaver I is priced at $45 and has unit variable costs of $26. The LifeSaver II will be priced at $39 and will carry unit variable costs of $24. First year LifeSaver II sales are projected at 375,000 units. The company had expected to sell 450,000 LifeSaver I alarms, without the introduction of LifeSaver II. While difficult to estimate, the company believes that about 200,000 LifeSaver I's will be cannibalized by the introduction of the LifeSaver II.

Calculate the reduced 2013 total contribution margin for LifeSaver I, assuming that LifeSaver II is introduced.

ANSWER IS 4,750,000 , SHOW ME WORK AND EQUATIONS TO GET IT

Explanation / Answer

Contribution = Selling price- Variable Cost

LifeSaver I Contribution is = 45 - 26 =19

LifeSaver II Contribution is = 39 - 24 =15

Meaning of cannibilization : Reduction in sales volume of any existing product due to introduction of any new product.

Here cannibilized volume of lifeSaver I is 200000 (given in question)

So, loss in contribution is = Number of units cannibilised * contribution per unit of life saver 1

= 200000 * 19

= 3800000.

Contribution for Lifesaver I will be = 250000 units * 19 per unit = 4750000

Contribution for Lifesaver II will be = 3750000 units * 15 per unit = 5625000

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