Fluid Company operates a small factory in which it manufactures two products: Fruju and Aqua. Production and sales results for last years were as follows:
|
Fruju
|
Aqua
|
|
Units sold
|
9,800
|
21,000
|
|
Selling price per unit
|
$95
|
$75
|
|
Variable cost per unit
|
$50
|
$40
|
|
Fixed cost per unit
|
$24
|
$24
|
For purposes of simplicity, the firm averages total fixed costs over the total number of units of Fruju and Aqua produced and sold.
The research department has developed a new product, Mixed Fruit as a replacement for Aqua. Market studies show that Fluid Company could sell 10,000 units of Mixed Fruit next year at a price of $115.
The variable cost per unit of Mixed Fruit is $45.
The introduction of product Mixed Fruit will lead to a 10% increase in demand for product Fruju and discontinuation of product Aqua.
If the company does not introduce the new product, it expects next year's results to be the same as last year's.
Required:
Write a memo to the management of Fluid Company discussing whether the Fluid Company should introduce Product Mixed Fruit next year. Explain why or why not with appropriate computations.