Reference no: EM132414450

1. WeedMart now sells two strains of marijuana that have different levels of quality: Purple which sells for $60/ounce with a variable cost of $17, and the Sour Diesel priced at $40/ounce with a variable cost of $10. The company predicts that it will sell about 20,000 pounds of Purple and 30,000 pounds of Sour Diesel next year.

The management team is considering the launch of a new strain called Unleaded at a lower price point of $30/ounce with a variable cost of $8. They forecast selling 15,000 pounds in the first year. Forty percent of these sales are expected to be incremental demand, 40% is expected to come from cannibalizing Sour Diesel sales and the remaining 20% is expected to come from Purple sales. If they launch Unleaded, they will need to spend $90,000 in R&D and about $150,000 in promotion in marijuana-themed magazines.

Note: 16 ounces = 1 pound

Please show calculations to answer the following:

a. Should WeedMart launch the Unleaded?

b. In year two, (without the Unleaded) sales of Purple are expected to increase by 30% and Sour Diesel will increase by 20%. The forecast is for 20,000 pounds of Unleaded in year two, and the cannibalization rates are expected to be about the same. They expect that promotion will cost $250,000 in year two. Considering both years, should they still launch it?