Question

Chapter 10 metade Print 2. Erosion costs. Heavenly Cookie Company reports the following annual sales and costs for its current product line: Click on this icon to download the data from this table Chocolate Snicker- Peanut Lemon Cream- Chip doodle Butter Drop Filled Volume 255,000 206,000 144,000 82,000 94,000 Price $0.50 $0.46 $0.52 $0.47 $0.58 Cost $0.22 $0.19 $0.17 $0.24 $0.30 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 $0.85 to produce. The forecasted brownie volume is 220,000 per year. Introduction of brownies, however, will reduce cookie sales by 196,000, with the following drops in sales per cookie: 111,000 in chocolate chip, 39,000 in snickerdoodle, 28,000 in peanut butter, 9,000 in lemon drop, and 9,000 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? What is the erosion cost of introducing the brownies? (Round to the nearest dollar.) What is the net change in annual margin if Mississippi Mud brownies are added to the product line? (Round to the nearest dollar.) Should the brownies be adopted into the product line? (Select the best response.) O A. Add brownies to the product mix. OB. Do not add brownies to the product mix.

Answer 1

Erosion cost is the contribution margin lost on existing products

= (0.5-0.22)*111000 + (0.46-0.19)*39,000 + (0.52-0.17)*28000 + (0.47-0.24)*9000 + (0.58-0.30)*9000

= $56,000

Net change = (0.92-0.85)*220,000 – 56,000

= -$40,600

B.DO not add