Max Leonard, VP of Marketing for DYSK computer, Inc., must decide whether to introduce a mid-priced version of the firm's super computer product line-the DC X5 next year. This new model would sell for $3,900 each, with a variable cost of $1,800 per unit.
Sales projection indicates that this new model would achieve a projected sales volume of 50,000 units in its first year of introduction. Furthermore, half of this 50,000 units would be bought by new customers, but cannibalization is also expected: (1) 30 percent of the 50,000 units would be bought by existing customers who switches from the company's higher-priced DC Omega model, which sells for $5,900 (with variable costs of $2,200 per unit); (2) 20 percent of the X5 model's projected sales volume would be switched from the economy-priced DC Alpha model, priced at $2,500 (with variable costs of $1,200).
(For simplicity, let's assume that, for the switching customers, each X5 bought was each Omega or Alpha not bought. In other words, the switch rate is 1-1.)
It is further predicted that, as a result of the cannibalization effect, if the X5 model is introduced, the DC Omega model's sales volume is expected to be 40,000 units next year, and the Alpha 60,000 units.
The advertising and promotional cost for launching the X model is forecasted to be $2 million for the first year.
Question: Should Mr. Leonard add the X5 model to the product line? (Hint: compare two scenarios: 1. the total gross profit if X5 is not launched 2. the total profit or loss if X5 is launched.)