Question

​Kellogg's, maker of​ Pop-Tarts, recently introduced​ Pop-Tarts Gone​ Nutty! The new product includes flavors such as peanut butter and chocolate peanut butter. Although the new Gone​ Nutty! product will reap a higher wholesale price for the company ​($1.25 per​ eight-count package of the new product versus ​$1.00 per package for the original​ product), it also comes with higher variable costs ​($0.60 per​ eight-count package for the new product versus ​$0.25 per​ eight-count package for the original​ product). Assume the company expects to sell 6 million packages of​ Pop-Tarts Gone​ Nutty! in the first year after introduction but expects that 75 percent of those sales will come from buyers who would normally purchase existing​ Pop-Tart flavors​ (that is, cannibalized​ sales). Assuming the sales of regular​ Pop-Tarts are normally 290 million packages per year and that the company will incur an increase in fixed costs of ​$610 comma 000 during the first year to launch Gone​ Nutty!, will the new product be profitable for the​ company? Determine the unit contributions and the loss for every package cannibalized from the original product. ​(Round to the nearest​ cent.) Original​ Pop-Tarts ​Pop-Tarts Gone​ Nutty! Loss for every package cannibalized Unit contribution ​$ nothing ​$ nothing ​$ nothing

Answer 1

Answer:

As the differencial is positiveat the contribution level the company should move ahead with the new product.

Explanation:

We have to compare the differential cost-volume-profit analysis of each product:

$\left[\begin{array}{cccc}&New&Old&Differential\\ sales&1.25&1&0.25\\ variable cost&-0.6&-0.25&-0.35\\ contribution&0.65&0.75&-0.1\\ volume&6000000&4500000&1500000\\ Contribution&3900000&3375000&525000\\\end{array}\right]$

While the contribution per unit is lowe for the new product the firm will increase their overall contribution at the relevant range. Hence it will be wise o switch products.