Hair Zonemanufactures A Brand Of Hair Styling Gel It Is Considering Adding A Mod

3.1.        Hair Zone manufactures a brand of hair styling gel.  It is considering adding a modified version of the product—a foam that provides stronger hold.  Hair Zone’s variable costs and prices to wholesalers are:

Current hair gel

New foam product

Unit selling price

4.00

5.50

Unit variable costs

1.70

2.50

Hair Zone expects to sell 1 million units of the new styling foam in the first year after introduction, but it expects that 50% of those sales will come from buyers who normally purchase Hair Zone’s styling gel.  Hair Zone estimates that it would sell 1.5 million units of the gel if it did not introduce the foam.  If the fixed cost of launching the new foam will be $100,000 during the first year, should Hair Zone add the new product to its line?  Why or why not?

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