C&A Music is a small guitar supply and repair company located in Los Angeles, CA
ID: 2670194 • Letter: C
Question
C&A Music is a small guitar supply and repair company located in Los Angeles, CA. The company originally repaired guitars and sold guitar accessories when it was founded over 10 years ago. Over the years, the company has expanded, and it is now a reputable manufacturer of various boutique guitar-related electronic items.
One of the major revenue-producing items manufactured by C&A Music is a digital effects pedal. C&A currently has one model on the market and sales have been excellent. The pedal is a unique item in that it comes in a variety of colors and can be customized to each individual’s music taste. However, as with any electronic item, technology changes rapidly, and the current pedal has limited features in comparison with newer models. C&A spent $5,500 to develop a prototype for a new pedal that has all the features of the existing one, but adds new features to keep up with competitor’s models and customer demands. The company has spent a further $2,300 for a marketing study to determine the expected sales figures for the new pedal.
C&A can manufacture the new pedal for $93 each in variable costs. Fixed costs for the operation are estimated to run $21,500 per year. The estimated sales volume is 300, 340, 660, 425, and 475 per each year for the next five years, respectively. The unit sales price of the new pedal will be $199. The necessary equipment can be purchased for $26,500 and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $6,500.
Net working capital for the pedals will be 20 percent of sales and will occur with the timing of the cash flows for the year (i.e., there is no initial outlay for NWC). Changes in NWC will first occur in Year 1 with the first year's sales. C&A Music has a 35 percent corporate tax rate, a 13 percent required return and 4 year payback requirement.
C&A Music would like to know the following:
Questions:
6. Suppose C&A Music loses sales on the older model because of the introduction of the new model, how would this affect your analysis?
Explanation / Answer
If you neglect the first model and look at the new model, we observe that here is a huge profit from that which is increasing in the second year and slighly decreasing after that. removal of the previous product from the market will firstly remove a cheaper alternative from the market thus reducing customers, and thereby affecting sales, also incase the newer model remains which it should for optimum profit, the sales will fall by the its feature/price ratio to the new one PLEASE RATE
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