Quirk and Company Has Been Busy Analyzing a New Product

question 36

Multiple Choice

Quirk and Company has been busy analyzing a new product. It has determined that an operating cash flow of $18,500 will result in a zero net present value,which is a company requirement for project acceptance. The fixed costs are $14,000 and the contribution margin is $8.00. The company feels that it can realistically capture 10% of the 40,000 unit market for this product. Should the company develop the new product? Why or why not?

• A) No; because 4,000 units of sales is less than the quantity required for a zero net present value
• B) No; because the internal break-even point is greater than 4,000 units
• C) Yes; because the firm can generate sufficient sales to obtain at least a zero net present value
• D) Yes; because the project has an expected internal rate of return of 100%
• E) Yes; because the project will pay back on a discounted basis

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Definitions:

Inferior Good

A type of good for which demand decreases as the income of consumers increases, inversely related to the consumer's income.

Complementary Good

A product that is consumed with another product, where demand for one increases demand for the other.

Normal Good

A good for which demand increases as the income of consumers increases.

Supply Curve

The supply curve is a graphical representation showing the relationship between the quantity of a good that producers are willing to sell and the price of the good.