Thompson & Son Have Been Busy Analyzing a New Product

question 294

Multiple Choice

Thompson & Son have been busy analyzing a new product. They have determined that an operating cash flow of $16,700 will result in a zero net present value, which is a company requirement for project acceptance. The fixed costs are $12,378 and the contribution margin is $6.20. The company feels that they can realistically capture 10 percent of the 50,000 unit market for this product. Should the company develop the new product? Why or why not?

• A) Yes; because 5,000 units of sales exceeds the quantity required for a zero net present value.
• B) Yes; because the cash break-even point is less than 5,000 units.
• C) No; because the firm cannot generate sufficient sales to obtain at least a zero net present value.
• D) No; because the project has an expected internal rate of return of negative 100 percent.
• E) No; because the project will not pay back on a discounted basis.

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Definitions:

Total Revenue

The cumulative amount of proceeds a company collects from merchandise sales or service offerings over an established period.

Price Per Unit

The cost assigned to a single unit of a product or service.

Marginal Revenue

The boost in income generated from selling an extra unit of product.

Surround Sound Systems

Audio systems designed to create a more immersive listening experience by using multiple speakers placed around the listener to replicate a multi-dimensional sound environment.