Question

Tony Knowles, CEO of lawnmower manufacturer Grassy Knowles LLC, has licensed software from the makers of Roomba in order to create the first self-directed, programmable lawnmower; he has branded this new mower the Goat. Knowles anticipates that fixed costs, including the plant and robotic assembly, will be $18 million for the first year. Projected sales for the first year are 90,000 units. Unit variable costs, including all mechanical and technical parts plus the licensing fee (contracted on a per-unit basis), add up to $1100 per mower. Using these parameters, project the price Tony would need to charge to breakeven.

Fixed cost = $18 million

Variable cost = $1,100 per mower

Projected sales = 90,000 units

Breakeven = Fixed cost per unit + Variable cost

Breakeven = (18,000,000 / 90,000) + 1,100; (200) + 1,100

Breakeven = $1,300

QUESTION: Grassy Knowles already sells two other models of mowers: an upscale, best-selling rider mower called the Ben Hur (list price at $3199), and a mid-level self-propelled mower called the Weekender (list price at $1899). Knowles wants to conduct a cannibalization analysis to investigate whether the introduction of the Goat will positively or negatively influence the company’s bottom line.

• The Ben Hur variable costs stand at $1600/unit and are projected to sell 150,000 in the coming year if there is no Goat. Weekender variable costs are $1400/unit, with projected sales of 120,000 if there is no Goat.

• Half of next year’s sales for the Goat (as expressed in part A) would come from new customers who have never purchased a Knowles product before, and half would be cannibalized from current Knowles customers. 60% of cannibalized sales will be at the expense of the Ben Hur, and 40% taken from the Weekender.

• Knowles has decided to introduce the Goat at a 50% markup on the breakeven price, as calculated in A.

R&D has begun cannibalization analysis below. Finish the work and show all work for full credit. Discuss whether the introduction of the Goat project is economically viable for the company as a whole.

Next year, without the Goat
Product	p	uvc	Contrib/unit	Unit Sales	Contribution
Ben Hur	3199			150000
Weekender	1899			120000

Next year, with the Goat
Product	p	uvc	Contrib/unit	Unit Sales	Contribution
Ben Hur	3199
Weekender	1899
Goat				90000

Answer 1

ANSWER 1

Break even is a price which is charged so that no loss or profit is incurred at that price point. It is generally addition of all costs incurred divided by number of units produced. Here, it would be:

Break-even price = Fixed cost per unit + Variable cost = $ 17 m / 85000 units + 1100 = $ 1300

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