Question

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

	Chocolate Chip	Snickerdoodle	Peanut Butter	Lemon Drop	Cream-Filled
Volume	250000	204000	140000	81000	94000
Price	$0.40	$0.48	$0.54	$0.46	$0.58
Cost	$0.21	$0.20	$0.16	$0.21	$0.33

Heavenly is thinking of adding Mississippi Mud brownies to the product line. The​ ultra-rich brownies would sell for ​$0.92 a piece and cost $0.80 to produce. The forecasted brownie volume is 223,000 per year. Introduction of​ brownies, however, will reduce cookie sales by 190,500​,with the following drops in sales per​ cookie: 110,000in chocolate​ chip, 36,000 in​ snickerdoodle, 28,000 in peanut​ butter, 7,000 in lemon​ drop, and 9,500 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 of chocolate chip = Drop in Sales * ( Price - Cost) = 110,000 * ( 0.4 -0.21) = 20900

Erosion of snickerdoodle= Drop in Sales * ( Price - Cost) = 36,000 * ( 0.48-0.2) = 10080

Erosion of peanut butter= Drop in Sales * ( Price - Cost) = 28,000 * ( 0.54-0.16) = 10640

Erosion of lemon drop= Drop in Sales * ( Price - Cost) = 7000 * ( 0.46-0.21) = 1750

Erosion of cream filled= Drop in Sales * ( Price - Cost) = 9500 * ( 0.58-0.33) = 2375

Total erosion costs = 20900 + 10080+10640+1750+2375 = 45745

margin generated through brownie sales = Sales of brownie * ( 0.92-0.8 ) * 223000 = 26760

Net change in annual margin = 45745 - 26760 = 18985