ALRAYAN Electronics CO.

ALRAYAN Electronics (Hypothetical Company) is a midsized electronics manufacturer located
in West Bay, Doha. When it was founded over 8 years ago, the company originally repaired radios
and other household appliances. Over the years, the company expanded into manufacturing and is
now a reputable manufacturer of various electronic items. A recent CBE graduate has been hired
by the company’s finance department.
One of the major revenue- producing items manufactured by ALRAYAN is a smart phone.
ALRAYAN currently has one smart phone model on the market, and sales have been excellent.
The smart phone is a unique item in that it comes in a variety of tropical colors. However, as with
any electronic item, technology changes rapidly, and the current smart phone has limited features
in comparison with newer models. ALRAYAN spent $3,600,000 to develop a prototype for a new
smart phone that has all the features of the existing smart phone but adds new features such as
WiFi tethering. The company has spent a further $300,000 for a marketing study to determine the
expected sales figures for the new smart phone.
ALRAYAN can manufacture the new smart phones for $300 each in variable costs. Fixed costs for
the operation are estimated to run $ 3.5 million per year. The estimated sales volume is 150,000,
120,000, 180,000, 180,000 and 80,000 per year for the next 6 years, respectively. The unit price of
the new smart phone will be $500. The necessary equipment can be purchased for $40 million and
will be depreciated on a Five-years MACRS schedule. It is believed the value of the equipment in
five years will be $10 million.
As previously stated, ALRAYAN currently manufactures a smart phone. Production of the
existing model is expected to be terminated in two years. If ALRAYAN does not introduce the
new smart phone, sales will be 90,000 units and 80,000 units for the next two years , respectively.
The price of the existing smart phone is $420 per unit, with variable costs of $250 each and fixed