Question

Al Hoffman is in the dessert business; he sells flavors to other companies that produce desserts, such as ice cream, pies, etc.  Last year, he sold 1,000,000 units of his various dessert flavors.  Caramel was the most popular flavor.  Now, he is wondering if he should introduce a new dessert flavor, butterscotch.  He expects that the new flavor would sell well, and estimates sales of the new butterscotch flavor will be 200,000 units. Of that 200,000, he estimates 120,000 units will come from customers switching from his competitor, and the rest would be from cannibalizing the sales of his own other dessert flavor, caramel.

Here are the costs associated with producing the flavors:

–Variable costs of caramel(per single unit): 10 cents for raw ingredient; 10 cents for production; 5 cents for shipping.

–Variable costs of butterscotch(per single unit):  18 cents for raw ingredient; 7 cents for production; 5 cents for shipping.

Both caramel and butterscotch are sold to the other companies for a price of $0.50 per unit.

From a financial profit point of view, should Al  introduce the new butterscotch flavor?  Begin your answer with Yes or No, and briefly explain the reasoning behind your recommendation.

Answer 1