Sound Well Music Company Ltd (SMC) manufactures cassette record players. It is operating at full capacity of 10,000 units annually with a sales price of `3,000 per unit. The cost data are: (i) Raw materials, `900 per unit, (ii) Direct labour, `400 per unit, (iii) Variable overheads, `300 per unit, and (iv) Fixed cost, `60,00,000. While the SMC was planning to expand its operations, Audiocon Ltd launched a new competitive product: HiFi CD player at `3,500 per unit. To meet the competition from this new product, the SMC has under consideration two alternatives: (i) Reduce the price of the cassette player to `2,499 (ii) Add new features to the product by further processing and sell for `3,700. The further processing of the product would involve the following.
— Raw materials cost, `600 per unit;
— Labour charges, `300 per unit;
— Additional variable overheads, `300 per unit; and
— Additional fixed costs, `40,00,000. As a consultant, what course of action would you recommend the SMC to follow?