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Erosion costs. Fat Tire Bicycle Company currently sells 40,000 bicycles per year. The current bike is...

Erosion costs. Fat Tire Bicycle Company currently sells 40,000 bicycles per year. The current bike is a standard​ balloon-tire bike selling for ​$120​, with a production and shipping cost of ​$25. The company is thinking of introducing an​ off-road bike with a projected selling price of ​$410 and a production and shipping cost of ​$225. The projected annual sales for the​ off-road bike are 17,000. The company will lose sales in​ fat-tire bikes of 7500 units per year if it introduces the new​ bike, however. What is the erosion cost from the new​ bike? Should Fat Tire start producing the​ off-road bike?

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Answer #1

Erosion cost from the new bike should be equal to=7500*(120-25)
=$712,500
Incremental earnings from off road bikes=17000*(410-225)=$3,145,000

As incremental earnings is more than erosion cost, Fat Tire should start producing the off-road bike

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