Answer:
Should Hair Zone add the new product to its line? Why or why not?
- Yes they should, since it would increase their total net income by $210,000.
Explanation:
Current hair gel New foam product
Unit selling price $2.00 $2.25
Unit variable costs $0.85 $1.25
expected sales for new foam product 1,000,000 units, but 600,000 units would replace sales from current hair gel
expected sales for current hair gel if new foam is introduced 900,000 units (1,500,000 if no new product is introduced)
Alternative 1 Alternative 2 Differential
no new foam new foam income
total sales revenue $3,000,000 $4,050,000 $1,050,000
total variable costs ($1,275,000) ($2,015,000) ($740,000)
additional fixed costs $0 ($100,000) ($100,000)
total $1,725,000 $1,935,000 $210,000
