Reference no: EM131889830

Barbara Hoffman is wondering whether she should introduce a new dessert flavor, butterscotch, based on test market information she has received. The new brand that she produces for $0.14 per unit (variable cost) has sold for $0.25 per unit and has done well against her competitor's caramel brand. Barbara estimates her butterscotch would sell 500,000 units in its first year of which 300,000 would represent switches to her lower-priced butterscotch from the competing caramel She is worried, however, since she also estimates 20 percent of the butterscotch volume will come from her own chocolate customers (chocolate had a variable cost of $0.13 per unit and sold for $0.23 per unit) and remaining 20 percent of the butterscotch volume will come from her own strawberry customers (strawberry had a variable cost of $0.16 per unit and sold for $0.25 per unit). Last year, Barbara sold 1.5 million units of dessert, of which a third were strawberry. Barbara wants an improvement in her gross contribution of at least 10 percent; otherwise she will not introduce butterscotch. What should she do?

Hint: This problem simply involves computing gross contribution (uQ) 5 times. The twist is finding the sales units after cannibalization for strawberry and chocolate. The mistake that is often made is that the base for the cannibalized percentage is taken to be each cannibalized product, when in reality it is the new product.