Question

Winchester Homes currently sells 28,000 townhouses per year at $77,000 each and 7,000 luxury homes per year for $120,000 each. The company wants to introduce a new modular home to fill out its product line. It hopes to sell 29,000 of the new modular home per year at $23,500 each. An independent consultant has determined that if the company introduces the new modular home, it should boost the sales of its existing townhouses by 2,500 per year and reduce the sales of its luxury homes by 750 per year. What is the amount to use as the annual sales figure when evaluating this project? Why?

Answer 1

Sales due solely to the new product line = 29,000 * $23,500 = $681,500,000

Increased sales of the motor home line occur because of the new product line introduction; thus:

2,500 * $77,000 = $192,500,000

in new sales is relevant. Erosion of luxury motor coach sales is also due to the new mid-size campers; thus

750 * $120,000 = $90,000,000 loss in sales

is relevant. The net sales figure to use in evaluating the new line is thus:

Net sales = $681,500,000 + $192,500,000 - $90,000,000

Net sales = $784,000,000