Question

Erosion costs. Fat Tire Bicycle Company currently sells 40 comma 000 bicycles per year. The current bike is a standard​ balloon-tire bike selling for ​$90​, with a production and shipping cost of ​$35. The company is thinking of introducing an​ off-road bike with a projected selling price of ​$410 and a production and shipping cost of ​$360. The projected annual sales for the​ off-road bike are 12 comma 000. The company will lose sales in​ fat-tire bikes of 8 comma 000 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?

Answer 1

Instructions are listed below.

Step-by-step explanation:

Giving the following information:

Fat Tire Bicycle Company currently sells 40,000 bicycles per year. The current bike is a standard​ balloon-tire bike selling for ​$90​, with a production and shipping cost of ​$35. The company is thinking of introducing an​ off-road bike with a projected selling price of ​$410 and a production and shipping cost of ​$360. The projected annual sales for the​ off-road bike are 12,000. The company will lose sales in​ fat-tire bikes of 8,000 units per year

Erosion cost= (Units sales before launch - units sale after launch)*contribution margin

Erosion cost= (40,000 - 32,000)*(90-35)= $440,000

Effect on income= [(410 - 360)*12,000] - 440,000= $160,000

They should produce and sell the new bike.