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 ​($1.25 per​ eight-count package of the new product versus ​$1.00 per package for the original​ product), it also comes with higher variable costs ​($0.60 per​ eight-count package for the new product versus ​$0.25 per​ eight-count package for the original​ product). Assume the company expects to sell 6 million packages of​ Pop-Tarts Gone​ Nutty! in the first year after introduction but expects that  75 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 ​$610 comma 000 during the first year to launch Gone​ Nutty!, will the new product be profitable for the​ company? Determine the unit contributions and the loss for every package cannibalized ,from the original product. ​(Round to the nearest​ cent.) Original​ Pop-Tarts ​Pop-Tarts Gone​ Nutty! Loss for every package cannibalized Unit contribution ​$ nothing ​$ nothing ​$ nothing

Answer 1

	STEP 1 - CONTRIBUTION PER UNIT
		Original Product	Gone Nutty (new product)
	Wholesale Price per eight-count package	$                     1.25	$                                           1.00
	Less : Variable cost per package	$                     0.60	$                                           0.25
	Contribution per unit	$                     0.65	$                                           0.75

	STEP 2 - CONTRIBUTION LOST DUE TO CANNIBALIZED SALES
	Expected sales of Gone nutty	6,000,000
	Cannibalized sales - Original Product (75%)	4,500,000
	Contribution per unit of original product	$                     0.65
	CONTRIBUTION LOST DUE TO CANNIBALIZED SALES (4,50,000 x $0.65)	$     2,925,000.00

	STEP 3 - DETERMINING PROFITABILITY OF GONE NUTTTY (New product)
	Contribution per unit of Gone Nutty	$                     0.75
	Expected sales (In number of package)	6,000,000
	Total contribution from Gone nutty ($0.75 x 6,000,000)	$     4,500,000.00
	Less :
	Additional Fixed cost	$        610,000.00
	Contribution lost due to cannibalized sales	$     2,925,000.00
	Profit	$        965,000.00

Despite the huge volume of cannibalized sales, the new product, Gone Nutty, expect to increase the profit by $965,000 and hence it is profitable and recommended for production.