Question

​Kellogg's, maker of​ Pop-Tarts, recently introduced​ Pop-Tarts Gone​ Nutty! The new product includes flavors such as peanut butter and chocolate peanut butter. Although the new Gone​ Nutty! product will reap a higher wholesale price for the company ​($1.25 per​ eight-count package of the new product versus ​$1.00 per package for the original​ product), it also comes with higher variable costs ​($0.60 per​ eight-count package for the new product versus ​$0.25 per​ eight-count package for the original​ product). Assume the company expects to sell 6 million packages of​ Pop-Tarts Gone​ Nutty! in the first year after introduction but expects that 75 percent of those sales will come from buyers who would normally purchase existing​ Pop-Tart flavors​ (that is, cannibalized​ sales). Assuming the sales of regular​ Pop-Tarts are normally 290 million packages per year and that the company will incur an increase in fixed costs of ​$610 comma 000 during the first year to launch Gone​ Nutty!, will the new product be profitable for the​ company? Determine the unit contributions and the loss for every package cannibalized from the original product. ​(Round to the nearest​ cent.) Original​ Pop-Tarts ​Pop-Tarts Gone​ Nutty! Loss for every package cannibalized Unit contribution ​$ nothing ​$ nothing ​$ nothing

Answer 1

Kellogg's new Pop-Tarts Gone Nutty! will have a unit contribution of $0.65 per package, while the original Pop-Tarts have a higher unit contribution of $0.75. Each cannibalized sale leads to a $0.10 loss per package. Profitability must consider these figures against the increased fixed costs of $610,000.

Step-by-step explanation:

When determining whether Kellogg's introduction of Pop-Tarts Gone Nutty! will be profitable, we must first calculate the unit contribution for each product. The unit contribution is the selling price minus the variable cost per unit. For the original Pop-Tarts, the unit contribution is $1.00 - $0.25 = $0.75 per package. For Pop-Tarts Gone Nutty!, the unit contribution is $1.25 - $0.60 = $0.65 per package.

The cannibalization effect occurs when a new product eats into the sales of an existing product. Since 75% of Pop-Tarts Gone Nutty! sales are expected to cannibalize the original Pop-Tarts sales, this loss per cannibalized unit is: $0.75 (unit contribution of original) - $0.65 (unit contribution of new) = $0.10.

The profitability of Pop-Tarts Gone Nutty! must account for the increased fixed costs of $610,000. We will need to compare the net contributions of the new product sales (including the cannibalized ones) to these fixed costs to determine overall profitability.

Answer 2

As the differencial is positiveat the contribution level the company should move ahead with the new product.

Step-by-step explanation:

We have to compare the differential cost-volume-profit analysis of each product:

`\left[\begin{array}{cccc}&New&Old&Differential\\$sales&1.25&1&0.25\\$variable cost&-0.6&-0.25&-0.35\\$contribution&0.65&0.75&-0.1\\$volume&6000000&4500000&1500000\\$Contribution&3900000&3375000&525000\\\end{array}\right]`

While the contribution per unit is lowe for the new product the firm will increase their overall contribution at the relevant range. Hence it will be wise o switch products.