Question

(Can you explain to me how do you find the Unit sales after launch of $85,000)

Example 1: Erosion Costs
Frosty Desserts currently sell 100,000 of its Strawberry Shortcake Delight (SSD) each year for $3.50 per serving
Its cost per serving is $1.75
Its chef has come up with a newer, richer concoction, "Extra Creamy Strawberry Wonder (ESW), which costs $2.00 per serving, will retail for $4.50 and should bring in 130,000 customers
It is estimated that after the launch, the sales for the original variety will drop by 15%
Estimate the erosion cost associated with this venture

Answer 1

To estimate the unit sales after launch for Strawberry Shortcake Delight (SSD), take the initial sales volume (100,000 units), and subtract the percentage decrease due to the new product launch (15%), resulting in 85,000 units. Calculate erosion cost by multiplying the loss in sales volume by the net profit per unit.

Step-by-step explanation:

To calculate the unit sales after launch, we would begin with the original sales volume for Strawberry Shortcake Delight (SSD), which is 100,000 units. After the launch of the new product, Extra Creamy Strawberry Wonder (ESW), the sales of SSD are expected to drop by 15%. Therefore, to find the new sales volume for SSD, we simply take the original volume and subtract the percentage of sales it is expected to lose due to erosion from the new product.

Calculations would be as follows:

• Original sales volume of SSD: 100,000 units
• Expected drop in sales after ESW launch: 15% of 100,000 = 15,000 units
• New sales volume of SSD after ESW launch: 100,000 - 15,000 = 85,000 units

So, the unit sales after launch for SSD would be 85,000 units. The erosion cost can then be estimated by accounting for the loss in sales multiplied by the net profit per unit of SSD, which is the price per serving minus the cost per serving.

Answer 2

$26,250

Step-by-step explanation:

Current units sold = 100,000 units

Drop in units after launch = 15%

Units to be sold after launch = 100,000 units - (100,000 units*15%)

Units to be sold after launch = 100,000 units - 15,000 units

Units to be sold after launch = 85,000 units

Erosion cost = (Unit sales of SSD before launch - Unit sales after launch) * (Selling price - Unit cost)

Erosion cost = (100,000 - 85,000) * ($3.50 - $1.75)

Erosion cost = 15,000 * $1.75

Erosion cost = $26,250

So, the estimated erosion cost associated with this venture is $26,250.