Question: Larry Miller, the general manager of Basil
Larry Miller, the general manager of Basil Software, scheduled a meeting on June 2, 2016, with Nicole Nguyen, sales manager, Andy Ayim, accountant, and Ellen Eisner, software operations manager, to discuss the development and release of Basil Software’s new version of its spreadsheet package, Easyspread 2.0. It is only a question of time before other software firms have a package that matches Easyspread 2.0. Nicole Nguyen, the sales manager, could hardly control her enthusiasm for the new product. Nicole Nguyen: This product is exactly what the market has been waiting for. We should not delay, by even a single day, the introduction of this product. Let’s make July 1, 2016, the sales release date. Ellen Eisner: I don’t disagree with Nicole’s assessment of the market potential for this product, but I have a problem. The threatened strike by our printers caused us to purchase large quantities of user’s manuals for Easyspread 1.0. We don’t like to store the manuals separately, so we also got extra CDs duplicated. The manuals and CDs were then packaged and shrink-wrapped. We are currently holding 60,000 completed packages, which equals the expected sales for July, August, and September 2016 of Easyspread 1.0. I think we should make October 1, 2016, the expected release date of Easyspread 2.0. This date would enable us to sell all of our inventory of Easyspread 1.0. Larry Miller: Nicole, do you see any problem with Ellen’s suggestion? Our inventory of Easyspread 1.0 seems rather large for us to ignore. If we introduce Easyspread 2.0 on July 1, what would we do with the inventory of Easyspread 1.0 that we currently hold? Nicole Nguyen: We currently sell Easyspread 1.0 to our wholesalers and distributors for $165 each. The additional optimization features in Easyspread 2.0 mean that we should be able to sell Easyspread 2.0 to our distributors for about $203.50. We should not ignore the higher profi t margins from Easyspread 2.0. It is true, though, that each time we sell one unit of Easyspread2.0, we forgo the sale of one unit of Easyspread 1.0. Since the expected demand for Easyspread 2.0 is at least as large as the demand for Easyspread 1.0, we may have to throw away the existing inventory of Easyspread 1.0 once we introduce Easyspread 2.0. Larry Miller: Andy, you’ve heard what Nicole and Ellen have to say. I would like you to do a detailed analysis of the alternatives, and let me know within a week what you come up with. We need to make a decision on this one way or another, and we need to do so soon. When Andy Ayim returned to his office, he pulled out the cost records he had developed for Easyspread 1.0 and Easyspread 2.0. The unit costs for the two products could be summarized as follows: 
The following additional facts are available: a. Basil contracts with outside vendors to print manuals and duplicate CDs. b. Development costs are allocated on the basis of the total costs of developing the software and the anticipated unit sales over the life of the software. c. Marketing and administration costs are fixed costs in 2016, incurred to support all activities of Basil Software. Marketing and administration costs are allocated to products on the basis of the budgeted revenue from each of the products. The preceding unit costs assume Easyspread 2.0 will be introduced on July 1, 2016. Required: 1. Based on financial considerations only, is Basil Software better off introducing Easyspread 2.0 immediately or waiting? Explain your conclusion, clearly identifying relevant and irrelevant costs. 2. What other factors might Nicole Nguyen and Ellen Eisner raise? What factors might Larry Miller consider important?
Transcribed Image Text:
Easyspread 1.0 Easyspread 2.0 Manuals, CDs $ 22.00 $ 27.50 Development costs 82.50 115.50 Marketing and administration costs 27.50 33.00 Total cost per unit $132.00 $176.00
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