The Colby Brothers Have Been Busy Analyzing a New Product

question 56

Multiple Choice

The Colby Brothers have been busy analyzing a new product. They have determined that an operating cash flow of $18,200 will result in a zero net present value, which is a company requirement for project acceptance. The fixed costs are $11,650 and the contribution margin is $7.40. The company feels that they can realistically capture five percent of the 75,000 unit market for this product. Should the company develop the new product? Why or why not?

• A) Yes; The project has an expected internal rate of return of 100 percent.
• B) Yes; The expected level of sales exceeds the required number of units.
• C) Yes; The project is expected to sell 324 units more than the required number of units.
• D) No; The expected level of sales is less than the required level of 4,034 units.
• E) No; The annual sales would need to exceed 4,521 units to be acceptable.

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Definitions:

Marginal Utility

The augmented enjoyment or usefulness that comes from the consumption of an additional unit of a product or service.

Optimal Labor Supply

The amount of labor hours that maximizes an individual's or firm's net benefits or utility.

Worth of Goods

The total value or market price of all goods considered or evaluated.

Labor Supply Curve

A graphical representation showing how the quantity of labor supplied varies with changes in wages, illustrating the relationship between wage levels and the labor force participation rate.