Question

Erosion

costs.

Fat Tire Bicycle Company currently sells

36,000

bicycles per year. The current bike is a standard​ balloon-tire bike selling for

​$100​,

with a production and shipping cost of

​$30.

The company is thinking of introducing an​ off-road bike with a projected selling price of

​$390

and a production and shipping cost of

​$250.

The projected annual sales for the​ off-road bike are

16,000.

The company will lose sales in​ fat-tire bikes of

7,500

units per year if it introduces the new​ bike, however. What is the erosion cost from the new​ bike? Should Fat Tire start producing the​ off-road bike?

What is the erosion cost from the new​ bike?

​$nothing  

​(Round to the nearest​ dollar.)

Answer 1

a). Erosion Cost = [Selling Price - P&S cost] * Lost sales in units

= [$100 - $30] * 7,500 = $70 * 7,500 = $525,000

b). Without off-road cycle project:

Net Annual CF with standard bike = [Selling Price - P&S cost] * units sold

= [$100 - $30] * 36,000 = $70 * 36,000 = $2,520,000

With off-road cycle project:

Net Annual CF = Net Annual CF with standard bike + Net Annual CF with off-road bike

= [(Selling Price - P&S cost) * (units sold - lost in sales)] + [(Selling Price - P&S cost) * units sold]

= [($100 - $30) * (36,000 - 7,500)] + [($390-$250) * 16,000]

= [$70 * 28,500] + [$140 * 16,000]

= $1,995,000 + $2,240,000 = $4,235,000

Increase of $1,715,000 per year so add new off-road bike to production.