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Question 1. a. What is AS’s margin (“unit contribution”) on SysView? Unit Contribution = Wholesale price – variable cost = $119 - $22 = $97 b. What is the retailer’s percentage margin on SysView? Percentage margin = (retail price – wholesale price)/retail price * 100%
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Question 1 • a. What is AS’s margin (“unit contribution”) on SysView? Unit Contribution = Wholesale price – variable cost = $119 - $22 = $97 • b. What is the retailer’s percentage margin on SysView? Percentage margin = (retail price – wholesale price)/retail price * 100% = ($199 – $119) / $199 * 100% = 40.2%
Question 2 • Strictly considering financial incentives (i.e., “all else equal”), would the retail network be more interested in selling SysView or LAN-Watcher to IT managers? Why? The retail network will be more interested in selling LAN-watcher to IT managers. While the unit contribution is the same for both products ($80), the percentage margin is higher for LAN-Watcher (50.3%) than for SysView (40.2%). With LAN-Watcher, retail can get the same unit contribution with less risk: a lower up-front investment.
Question 3 • Using only the fixed cost, variable cost, and price data provided above, what is the break-even volume for SysView in the first year? BEV = Fixed cost / Unit contribution = $85,000 / $97 = 876 units
Question 4 • Suppose that SysView’s development costs are to be treated as fixed costs for the purpose of determining product profitability. Now what is the break-even volume for SysView in the first year? BEV = Fixed cost / Unit Contribution = ($375,000 + $85,000) / $97 = 4742 units
Question 5 • If AS Management requires that all products at least break even in the first year of sales, do you recommend that Mr. Lopez process with this product? Why/why not? The market size is expected to be 4,000 units in the coming year. If we include our full development costs in our Break Even Analysis, we require 4,742 units to be sold, which is highly unlikely. However, these development costs are sunk costs, and should really be ignored in our analysis, leaving our break even volume at an easily-attainable 876 units. I would recommend that Mr. Lopez proceed.