Variable Cost and Model

Module Assignment 2-Problem Set Management Marketing MKT-450 Karen D. Nicosia Grand Canyon University August 29, 2010 Instructor: Prof. Freeman Problem 2-5 Video Concepts, Inc. (VCI) manufactures a line of DVD recorders (DVDs) that are distributed to large retailers. The line consists of three models of DVDs. The following data are available regarding the models: DVD Selling Price per unit Model LX1 Model LX2 Model LX3 $175.00 $250.00 $300.00 Variable Cost per unit $100.00 $125.00 $140.00 Demand/Year Units 2000 1000 500 VCI is considering the addition of a fourth model to its line of DVDs. This model would be sold to retailers for $375. The variable cost of this unit is $225. The demand for the new Model LX4 is estimated to be 300 units per year. Sixty percent of these unit sales of the new model is expected to come from other models already being manufacture by VCI (10 percent from Model LX1, 30 percent from Model LX2, and 60 percent from Model LX3).VCI will incur fixed cost of $20,000 to add the new model to the line. Based on the preceding data, should VCI add the new Model LX4 to its line of VCRs? Why? Current Situation Model LX1 Model LX2 2000 units 1000 units Unit price Sales Revenue Unit variable cost Total variable cost Unit contribution Total contribution Net Profit 175.00 350,000.00 100.00 200,000.00 75.00 150,000.00 $150,000.00 250.00 250,000.00 125.00 125,000.00 125.00 125,000.00 $125,000.00 Model LX3 500 units 300.00 150,000.00 140.00 70,000.00 160.00 80,000.00 $80,000.00 Situation Adding Model LX4 Model LX1 Model LX2 946 Model LX3 392 1982 units units units Unit price Sales Revenue Unit variable cost Total variable cost unit constribution Total contribution Fixed costs Net Profit 175.00 346,850.00 100.00 198,200.00 75.00 148,650.00 148,650.00 250.00 236,500.00 125.00 118,250.00 125.00 118,250.00 118,250.00 300.00 117,600.00 140.00 54,880.00 160.00 62,720.00 62,720.00 In my opinion the company should not add the new line Model LX4. Currently, VCI has