Question

Johnny Dang & Co. has designed three grillz (removable dental jewelry) models: Gold, Diamond, and Candy Paint. The prices of the models are: $1,200, $8,000, and $9,000, respectively. The variable costs for these models are: $400, $2,500, and $3,000, respectively. The demand projected for each model for next year are: 12,000, 3,500, and 2,000 units. Suppose they are now considering the addition of another product called the “World Series” priced at $6,000 with a variable cost of $1,500. Johnny Dang expects that they will sell 1,000 units of the new product next year. Sixty percent of the sales will be from cannibalization: 20% of the volume will be from the Candy Paint, 38% from the Diamond, and 2% of the Gold. The other 40% will come from market growth. The marketing costs for the World Series will be $3M and design costs will be $300,000. Should Johnny Dang launch the World Series? Show your calculations. [10] Suppose that in year 2, sales of the Gold, Diamond, and Candy Paint increase by 10%, 15%, and 5%, respectively. If the World Series was launched in the first year, then it is expected that the demand in the second year will increase to 1,300 units. Marketing costs in the second year for the World Series will be $1.5M. Assuming that cannibalization rates remain the same, would your decision from part (a) change? [10] Suppose they are trying decide between launching the World Series in the first year or in the second year. Which would be a better decision, assuming that they would spend the entire marketing budget in the second year if they launch it then, and the demand would be 2,300 units? [10]

Answer 1

1) The launch of "World Series" leads to reduced margin in the 1st year. Hence launch of new product leads to loss on account of canibalization

2) The total Margins in year 2 with " world series" is better than without the product. However if we add the impact on Year 1 and Year 2 together then the launch of "World Series" would be a -ve result. But the business decision would be based on longer term projections

3) Based on the assumption that the launch of world series in year 2 generates 2300 sales, the total margin of year 1 and year 2 is better than the decision of launching in year 1 . The total margin for combined 2 years  is 85,593,700 compared to 84,09,3700 (if World series launched in year 1)