Mary Williams, owner of Williams Products, is evaluating whether to introduce a new product line. After thinking through the production process and the costs of raw materials and new equipment, Williams estimates the variable costs of each unit produced and sold at $6 and the fixed costs per year at $60,000.
- If the selling price is set at $18 each, how many unit must be produced and sold for Williams to break even? Use both graphic and algebraic approaches to get your answer.
- Williams
forecasts sales of 10,000 units for the first year if the selling price is set at $14 each. What would be the total contribution to profits from this new product during the first year? - If the selling price is set at $12.50, Williams forecasts that first-year sales would increase to 15,000 units. Which pricing strategy ($14.00 or $12.50) would result in the greater total contribution to profits?
- What oilier considerations would be crucial to the final decision about making and marketing the new product?
a.
To calculate: The break even quantity using both graphic and algebraic approaches.
Concept Introduction: Break-even point is explained as a point where a company is earning no profits and incurring no losses reflecting that total cost is equivalent to total income.
Explanation of Solution
Given information:
Variable costs: $6 per unit
Fixed costs: $60,000
Selling price: $18 per unit
Break-even quantity: ?
Calculation of break even quantity:
Hence, the break even quantity is 5,000 units.
Graphic approach for calculating break even quantity:
Fig (1)
b.
To calculate: The total contribution to profits from this new product.
Concept Introduction: Profit is explained as surplus of total income over total costs.
Explanation of Solution
Given information:
Forecasted sales: 10,000 units
Selling price: $14 per unit
Calculation of total contribution to the profits:
Therefore, the total contribution from the new product is $20,000.
c.
To calculate: The total contribution to profits from this new product if selling price is $12.50.
Concept Introduction: Profit is explained as surplus of total income over total costs.
Explanation of Solution
Given information:
Forecasted sales: 15,000 units
Selling price: $12.50 per unit
Calculation of total contribution to the profits:
Therefore, the total contribution from the new product is $37,500.
If selling price is $14 and forecasted sales are 15,000 units, then,
Calculation of total contribution to the profits:
It can be concluded that when selling price is $14 then it can get a greater total contribution to Company W.
d.
To identify: The other considerations that would be crucial for final decision making for the new product.
Concept Introduction: Decision making is a process in which members of an organization select a particular course of action in response to both problem and opportunity. The objective of decision making is to gain a maximum and profitable result.
Explanation of Solution
Other considerations that would be crucial for final decision making of new product are:
- Company W can identify and evidently state the problems.
- Various other alternatives should be evaluated and for the same information should be collected.
Decisions are taken by organizations on the basis these procedures that are generally performed: break even analysis, decision tree, preference matrix and preference decision tree.
Want to see more full solutions like this?
Chapter A Solutions
Operations Management: Processes and Supply Chains, Student Value Edition Plus MyLab Operations Management with Pearson eText -- Access Card Package (11th Edition)
Additional Business Textbook Solutions
Operations and Supply Chain Management 9th edition
Operations Management, Binder Ready Version: An Integrated Approach
Loose-leaf for Operations Management (The Mcgraw-hill Series in Operations and Decision Sciences)
Business in Action (8th Edition)
Principles Of Operations Management
Business in Action
- Think of a new product or revise/innovate a product or service that you would like to see on the market. Discuss the implications of producing the product/service. Relative to Legal, ethical, environmental, profitability, competitive, design & production Issues (Brief description only)arrow_forwardConsider the following additional information – R&D and selling expenses are substantially higher for Zderm because it is a new product. Jim has strongly supported development of the new product, including the high selling and R&D expenses. He has assured the Board of Directors that the Zderminvestment will pay off in improved profits for the firm. Discuss the ethical issues, if any, facing Jim as he reports to top management on the profitability of the firm’s two products.arrow_forwardLucy always wanted to live in downtown San Francisco. For 10 years she has worked as a manager at an investment banking firm, where she is well paid. However, the most affordable condo is still more than $1 million more than she wants to pay. Although Lucy has the money to purchase the condo, she cannot justify to herself paying so much money for one person—even for a condo in the middle of downtown San Francisco. Lucy ______ part of the market for condos in downtown San Francisco because she ___________________ to buy. I believe the answers are is and has the ability Am I correct?arrow_forward
- When a multiproduct plant operates at full capacity, decision must be made as to which products to emphasize. These decisions are frequently made with a short run focus. In making such decisions, managers should select products with the A. Highest sales price per unit B. Highest sales volume potential C. Highest individual unit contribution margin D. Highest contribution margin per unit of the constraining resourcearrow_forwardThere are three steps to assessing product (ice cream) demand. Step 1: Talking Face-to-Face with Potential Customers Step 2: Using Online Tools Step 3: Library, Internet and Gumshoe Researcharrow_forwardCan i get help with question 3 and 4 pleasearrow_forward
- 3arrow_forwardNeed the correct answer to this practice question I found online please selecting one of the choices below What is a cost per mille? It is the total cost for a print advertisement. > It is the cost an advertiser pays to ship a print advertisement to its destination. > It is a percentage, which is based per thousand target viewers who have seen or heard an advertisement. > It is the formula for determining how much a billboard advertisement will cost based on how many miles away a person will see it.arrow_forwardGive 3 examples of hidden expenses for the purchase of a new cararrow_forward
- Practical Management ScienceOperations ManagementISBN:9781337406659Author:WINSTON, Wayne L.Publisher:Cengage,Operations ManagementOperations ManagementISBN:9781259667473Author:William J StevensonPublisher:McGraw-Hill EducationOperations and Supply Chain Management (Mcgraw-hi...Operations ManagementISBN:9781259666100Author:F. Robert Jacobs, Richard B ChasePublisher:McGraw-Hill Education
- Purchasing and Supply Chain ManagementOperations ManagementISBN:9781285869681Author:Robert M. Monczka, Robert B. Handfield, Larry C. Giunipero, James L. PattersonPublisher:Cengage LearningProduction and Operations Analysis, Seventh Editi...Operations ManagementISBN:9781478623069Author:Steven Nahmias, Tava Lennon OlsenPublisher:Waveland Press, Inc.