Assume the company expects to sell 300 million ounces of M&M Premiums within the first year after introduction but expects that half of those sales will come from buyers who would normally purchase M&M regular candies (that is, cannibalized sales). Assuming the sales of regular M&M candies are normally 1 billion ounces per year and that the company will incur an increase in fixed costs of $5 million during the first year of production for M&M Premiums, will the new product be profitable for the company? Refer to the discussion of cannibalization in Appendix 2: Marketing by the Numbers for an explanation regarding how to conduct this analysis.
Answer:-
It is estimated that the new M&M premium product will generate more 150million ounces in sales that is (300 million ounces -150 million ounces cannibalized units) will have $0.13 per ounce in contribution.
Contribution because of net new volume =150,000,000 * $0.13 per unit
= $19500000
The net effect is that the company will gain $16500000 in contribution by introducing the M&M premium
incremental contribution = $19.5 million - $3million
= $16.5 million
Yes new product is profitable and it will increase the company’s profitability in $11.5million.
Get Answers For Free
Most questions answered within 1 hours.