Question

Erosion costs. Fat Tire Bicycle Company currently sells bicycles per year. The current bike is a standard​ balloon-tire bike selling for ​$​, with a production and shipping cost of ​$. The company is thinking of introducing an​ off-road bike with a projected selling price of ​$ and a production and shipping cost of ​$. The projected annual sales for the​ off-road bike are . The company will lose sales in​ fat-tire bikes of 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? What is the erosion cost from the new​ bike?

Answer 1

Without specific financial figures, it is not possible to calculate the erosion cost for Fat Tire Bicycle Company or determine if they should produce the off-road bike. A cost-benefit analysis is vital, and environmental factors, such as trail damage, should be considered in their decision.

Step-by-step explanation:

The question asks us to calculate the erosion cost associated with Fat Tire Bicycle Company introducing a new off-road bike and how it might impact the sales of their current fat-tire bikes. It's important to note that erosion cost refers to the loss in sales of an existing product due to the introduction of a new product.
However, since the original question does not provide specific numbers for the current and projected selling prices, production and shipping costs, and the anticipated change in sales volumes, we cannot accurately calculate the erosion cost. To determine whether Fat Tire should start producing the off-road bike, a cost-benefit analysis would be necessary, considering both the erosion cost and the projected profits from the new bike.

Additionally, it's worth mentioning that educated mountain biking promotes environmental conservation, which could benefit Fat Tire's brand image. As suggested by Schwartz, studies have shown that bicycle tires cause similar or less trail damage than hikers' boots and significantly less than horses' hooves, supporting the case for peaceful coexistence in trail use.

Answer 2

A. $1,725,000

B. Yes

Step-by-step explanation:

Calculation for the erosion cost from the new​ bike

First step to find the erosion cost

Using this formula

Erosion cost =(Sales-Production and shipping cost )*Loss of sales units per year

Let plug in the formula

Erosion cost=(100-40)*7,500

Erosion cost=60*7,500

Erosion cost= $450,000

Second step is to calculate for the Net annual Cash flow using this formula

Net annual cash flow= (Projected selling price-Production and shipping cost)*Projected annual sales-Erosion cost

Let plug in the formula

Net annual cash flow= (370-225)*15,000 - 450,000

Net annual cash flow =145*15,000-450,000

Net annual cash flow =2,175,000-450,000

Net annual cash flow=$1,725,000

B.Yes Fat Tire start producing the​ off-road bike

Because the net annual cash flow is positive