Question

Cash and Go (CSG) is a grocery store. It is considering offering one hour photo developing in their store. The firm expects that sales from the new one-hour machine will be $150,000 per year. CSG currently offers overnight film processing with annual sales of $100,000. While many of the one-hour photo sales will be to new customers, CSG estimates that 70% of their current overnight photo customers will switch and use the one-hour service.

1. Estimate level of incremental sales associated with introducing the new one-hour photo service.
2. Suppose that of the 70% of CSG's current overnight photo customers, half would start taking their film to a competitor that offers one-hour photo processing if CSG fails to offer the one-hour service. Estimate the level of incremental sales in this case.

Answer 1

Answer :(a.) Calculation of Incremental Sales associated with introducing the new one-hour photo service :

Incremental Sales = Current Sales - Cannabilization of Sales

= 150000 - (100000 * 0.70)

= 150000 - 70000

= 80000

(b.) Calculation of Incremental Sales in case half would start taking their film to a competitor that offers one-hour photo processing :

Incremental Sales = Current Sales - Cannabilization of Sales

= 150000 - (100000 * 0.70 * 0.50)

= 150000 - 35000

= 115,000