Question

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	254,000	201,000	140,000	81,000	90,000
Price	$0.50	$0.47	$0.55	$0.49	$0.53
Cost	$0.22	$0.19	$0.16	$0.25	$0.35

Heavenly is thinking of adding Mississippi Mud brownies to the product line. The​ ultra-rich brownies would sell for $0.97 a piece and cost $0.75 to produce. The forecasted brownie volume is 225,000 per year. Introduction of​ brownies, however, will reduce cookie sales by 191,500, with the following drops in sales per​ cookie: 110,000 in chocolate chip, 39,000 in snickerdoodle, 26,000 in peanut butter, 7,000 in lemon drop, and 9,500 in cream filled.

a) What is the erosion cost of introducing the​ brownies?

b) What is the net change in annual margin if Mississippi Mud brownies are added to the product​ line?

c) Should the brownies be adopted into the product line?

Answer 1

a) Erosion cost of introducing brownies:

Chocolate chip cookies = 110,000 * (0.5 - 0.22) = 30800

Snicker doodle = 39000 * (0.47 - 0.19) = 10920

Peanut butter = 26000 * ( 0.49 -0.25) = 6240

Lemon drop = 7000 * (0.49 - 0.25) = 1680

Cream filled = 9500 * (0.53 - 0.35) = 1710

Total = 51350

b) Profits on addition of Mississippi Mud Brownies = 225000 * (0.97-0.75) = 49500

So, net loss = 49500 - 51350 = 1850

c) No the brownies should not be inducted into the product line as it causes a net loss for the company.