Question

Assume a company expects to sell 8 million packages of Pop-Tarts Gone Nutty in the first year after introduction but expects that 40 percent of those sales will come from buyers who would normally purchase existing Pop-Tart flavors (that is, cannibalized sales). The price for a package of Pop-Tarts Gone Nutty! is $1.30 and its variable cost is $0.60, when the price for a package of original Pop-Tart is $1.10 with variable cost of $0.30. Assuming the sales of regular Pop-Tarts are normally 300 million packages per year and that the company will incur an increase in fixed costs of $500,000 during the first year to launch Gone Nutty! wil the new product bo profitable for the company? Determine the unit contributions and the loss for every package cannibalized from the original product. (Round to the nearest cont.) original Pop-Tarts Unt contributions Pop-Tarts Gone Loss for every package Nutty! cannibalized su Contribution los due to cannibalization is (Round to the nearest dollar) Contribution due to not new volume is (Round to the nearest dollar) The increase in total contribution is $ Introducing the new product (Round to the nearest dollar) to profitable.

Answer 1

Unit contribution

Unit contribution = Selling price-Variable cost

Hence,

Unit contribution of Original pop tarts = $1.10 - $0.30 = $0.80

Unit contribution of Pop tarts gone nutty= $ 1.30 - $0.60 = $0.70

Loss for every package cannibalized = Unit contribution of original pop tarts - Unit contribution of pop tarts gone nutty

= $0.80 - $0.70 = $0.10

Contribution loss due to cannibalization

= (Number of units to be sold * percentage of sales come from existing customers) * loss for every package cannibalized

= ( 8000000 * 0.40) * (-0.10)

= - $320000

Contribution due to net new volume

= Units to be sold * (1 - percentage of sales come from existing customers)  * contribution of pop tarts gone nutty

= 8000000 * ( 1 - 0.40) * 0.70

= $3360000

Increase in total contribution

= Contribution due to net new volume + Contribution loss due to cannibalization

= $3360000 + (- 320000)

= $ 3040000

Introducing the new product should be profitable as its increases the contribution.