Question

Erosion

costs.

Heavenly Cookie Company reports the following annual sales and costs for its current product​ line:

	Chocolate Chip	​Snicker- doodle	Peanut Butter	Lemon Drop	​Cream- Filled
Volume	240,000	180,000	130,000	78,000	92,000
Price	​$0.49	​$0.49	​$0.49	​$0.49	​$0.59
Cost	​$0.19	​$0.17	​$0.15	​$0.22	​$0.31

Heavenly is thinking of adding Mississippi Mud brownies to the product line. The​ ultra-rich brownies would sell for

​$0.99 a piece and cost ​$0.81 to produce. The forecasted brownie volume is 250,000 per year. Introduction of​ brownies, however, will reduce cookie sales by 250,000​,

with the following drop in sales per​ cookie:130,000 in chocolate​ chip, 60,000 in​ snickerdoodle, 40,000 in peanut​ butter, 10,000 in lemon​ drop, and 10,000

in​ cream-filled. What is the erosion cost of introducing the​ brownies? What is the net change in annual margin if Mississippi Mud brownies are added to the product​ line?

Answer 1

Erosion cost = $77300

brownie margin = $45000

net change = $-32300

for any doubt

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