Question

Captain's Cereal is considering introducing a variation of its current breakfast cereal, Crunch Stuff. The new cereal will be similar to the old, with the exception that it will contain sugar-coated marshmallows shaped in the form of stars. The new cereal will be called Crunch Stuff n' Stars. It is estimated that the sales for the new cereal will be $25 million; however, 60 percent of those sales will draw from current Crunch Stuff customers who will switch to Crunch Stuff n' Stars but who will not switch if the new product is not introduced. What is the relevant sales level to consider when deciding whether or not to introduce Crunch Stuff n' Stars?

Answer 1

ANSWER: 10 million

Assuming that both products create equal value for company, relevant sales level to consider would be equal to $10 million or $10,000,000 because we need to subtract 60% of sales which come from existing products i.e., $15,000,000