Question

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 ​$1.00 per package for the original​ product), it also comes with higher variable costs ​($0.50 per​ eight-count package for the new product versus ​$0.15 per​ eight-count package for the original​ product). Assume the company expects to sell 4 million packages of​ Pop-Tarts Gone​ Nutty! in the first year after introduction but expects that 70 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 ​$350,000 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​ Nutty!	Loss for every package cannibalized
Unit contribution	​$	​$	​$

Answer 1

Answer:
As the differencial is positiveat the contribution level the company should move ahead with the new product.
Explanation:
We have to compare the differential cost-volume-profit analysis of each product:
	New	Old	Differential
Sales	1.15	1	0.15
Variable cost	0.5	0.15	0.35
Contribution	0.65	0.85	-0.2
Volume	40,00,000	28,00,000	12,00,000
Contribution	26,00,000	23,80,000	2,20,000
While the contribution per unit is lower for the new product the firm will increase their overall contribution at the relevant range. Hence it will be wise to switch products