Barbour Electric is considering the introduction of a new product. This product

Question

Barbour Electric is considering the introduction of a new product. This product can be produced in one of several ways: (a) using the present assembly line at a cost of $25 per unit, (b) using the current assembly line after it has been overhauled (at a cost of $10,000) with a cost of $22 per unit; and (c) on an entirely new assembly line (costing $30,000) designed especially for the new product with a per unit cost of $20.   Barbour is worried, however, about the impact of competition. If no competition occurs, they expect to sell 15,000 units the first year. With competition, the number of units sold is expected to drop to 9,000. At the moment, their best estimate is that there is a 40% chance of competition. They have decided to make their decision based on the first year sales. What do you recommend?

Explanation / Answer

1) Expected sales = 40% * 9000+ 60% * 15000 = 12600

Cost of producing 12600 units using

Method 1 = 25*12600 =315000

Method 2=10000+22*12600=287200

Method 3= 30000+12600*20= 282000

Here, Method 3 is recommended since it has lowest cost.

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