Reference no: EM132740419

Question - Hanes Corporation is considering launching a new face mask called the "Shield", priced at $7 each. The unit cost to produce it is $2, and they expect they would be able to sell 55,000,000 units in the first year of launching it. Marketing costs for the first year would be $30M and design costs (one-time) would be $300,000. They expect that 40% of that volume will be from incremental sales (market growth and from competitors).

Hanes now sells two other models that are fairly similar: the "Protector" which sells for $10 with a variable cost of $3, and the "Screen" priced at $5 with a variable cost of $1. The company predicts that it will sell about 100,000,000 units of the Protector and 225,000,000 of the Screen. If they launch the Shield, 35% of the volume will come from the Protector and the remaining 25% will come from the Screen.

Show calculations to answer the following:

a. Based on this information, would you suggest that Hanes proceed with the launch?

b. Suppose in the second year, sales volumes increase by 15% for the Protector and by 25% for the Screen without the Shield. However, if they launch the Shield, its volume would increase by 10,000,000 units, given a marketing expenditure of $20M. Consider the design cost sunk after the first year. Also, the variable costs for the Protector increased from $3 to $5.50 because of shortages. Would your decision change considering both years assuming the same cannibalization rates?