Posted: July 19th, 2016

Should Hamilton introduce the new model?

Hamilton Ltd is considering introducing a new digital camera model at price $105 per unit. Hamilton’s controller has compiled the following incremental cost information based on an estimate of 120000 units of sales annually for the new product:

direct material cost: $3600000
direct labour: $2400000
variable manufacturing support: $1200000
sales commission:10% of sales

The average inventory levels for the new product excluding the fixed manufacturing overhead are estimated as follows:

raw material: 2 months of production,
work in process (100% complete for materials and 50% complete for labour and variable manufacturing support)
finished goods: 2 months production
annual inventory carrying costs are estimated to 12% of inventory ( not including in the variable manufacturing support provided in the first table).

In addition the sales manager expect the introduction of the new model to result in a reduction in sales of existing model from 300000 to 240000 units, the contribution margin for the existing model is $20 per unit.

Should Hamilton introduce the new model? Why?