HA2011 Tutorial Questions On Management Accounting

Question 6 – Week 11 (13a) (11 marks)

EBP Ltd is a small firm involved in the production and sale of electronic business products. The company is well known for its attention to quality and innovation.

During the past 15 months, a new product has been under development that allows users handheld access to email and video images. EBP named the product ‘Wireless Wizard’ and has been quietly designing two models: Standard and Enhanced. Development costs have amounted to $181 500 and $262 500, respectively. The total market demand for each model is expected to be 40 000 units, and management anticipates being able to obtain the following market shares: Standard, 25 per cent; Enhanced, 20 per cent. Forecast data follow:

Since the start of development work on the Wireless Wizard, advances in technology have altered the market somewhat, and management now believes that the company can introduce only one of the two models. Consultants confirmed this fact not too long ago, with EBP paying $34 500 for an in-depth market study.

Required:

1. Calculate the per unit contribution margin for both models.
2. Which of the data above should be ignored in making the product introduction decision? For what reason?
3. Prepare a financial analysis and determine which of the two models should be introduced.