E7-17 Twyla Company operates a small factory in which it manufactures two products: C
and D. Production and sales results for last year were as follows.
| C | D | |
| Units sold | 9,000 | 20,000 |
| Sellingprice per unit | 95 | 75 |
| Variable cost per unit | 50 | 40 |
| Fixed cost per unit | 22 | 22 |
For purposes of simplicity, the firm averages total fixed costs over the total number of
units of C and D produced and sold.
The research department has developed a new product (E) as a replacement for product
D. Market studies show that Twyla Company could sell 10,000 units of E next year at a price
of $115; the variable cost per unit of E is $40. The introduction of product E will lead to a
10% increase in demand for product C and discontinuation of product D. If the company
does not introduce the new product, it expects next year’s results to be the same as last year’s.
Instructions
Should Twyla Company introduce product E next year? Explain why or why not. Show
calculations to support your decision.
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