HOW TO GET THE ANSWER %) Metrics 7.2 Question Help Kellogg\'s, maker of Pop-Tart
ID: 2548805 • Letter: H
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HOW TO GET THE ANSWER
%) Metrics 7.2 Question Help Kellogg's, maker of Pop-Tarts, recently introduced Pop-Tarts Gone Nutty! The new product includes flavors such as peanut butter and chocolate peanut butter. Although the new Gone Nutty! product will reap a higher wholesale price for the company ($1.15 per eight-count package of the new product versus $0.90 per package for the original product), it also comes with higher variable costs ($0.45 per eight-count package for the new product versus $0.10 per eight-count package for the original product). Assume the company expects to sell 3 million packages of Pop-Tarts Gone Nutty! in the first year after introduction but expects that 65 percent of those sales will come from buyers who would normally purchase existing Pop-Tart flavors (that is, cannibalized sales). Assuming the sales of regular Pop-Tarts are normally 290 million packages per year and that the company will incur an increase in fixed costs of $620,000 during the first year to launch Gone Nutty!, will the new product be profitable for the company? Determine the unit contributions and the loss for every package cannibalized from the original product. (Round to the nearest cent.) Original Pop-Tarts Pop-Tarts Gone Loss for every package Nutty! nnibalized Unit contribution $0.80 $0.70 S0.10 Contribution lost due to cannibalization is $ 195,000. (Round to the nearest dollar.) Contribution due to net new volume is $ 735,000. (Round to the nearest dollar.) The increase in total contribution is $ 540,000. (Round to the nearest dollar.) Introducing the new product should not be profitableExplanation / Answer
As per the question, 65% of sales of the new product will come from the people who purchase the old product. So, the sales of old product will come down to 35% of its expected sales. So, the sales of old product will come down to 290 million less 1.95 million (3000000*0.65).
Let us calculate the unit contribution for both the products:-
Contribution for Pop-Tarts gone nutty
Sales Price - Variable Cost = 1.15 - 0.45 = 0.70
Contribution of old product
Sales Price - Variable Cost = 0.90 - 0.10 = 0.80
So, with the production of new product loss in new product will be = 0.80 - 0.70 = $ 0.10 per package
Contribution lost due to cannibalization = 0.10 * 1,950,000 (reduction of old product sale) = $ 195,000
Contribution of net new sales of Pop carts gone crazy = 3,000,000 - 1,950,000 = 1,050,000 * 0.70 = $ 735,000
Total Contribution in $ for Pop-Tarts gone crazy = 0.70 * 3,000,000 = $ 2,100,000
Total Contribution in $ for old product = 0.80 * 288,050,000 = $ 230,440,000
So, Total contribution with the new product = 2,100,000 + 230,440,000 = 232,540,000
Contribution as per the old sales = 0.80 * 290,000,000 (old product sales) = 232,000,000
So, increase in total contribution = 232,540,000 - 232,000,000 = $ 540,000
However, there will be increase in $ 620,000 fixed cost with the new product. So, with its increase, the company will have loss of $ 80,000 (540,000 - 620,000)
So. introducing the new product will not be profitable.
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