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 ($1.10 per eight-count package of the new product versus $0.95 per package for the original product), it also comes with higher variable costs ($0.60 per eight-count package for the new product versus $0.30 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 70 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 280 million packages per year and that the company will incur an increase in fixed costs of $410,000 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.)

Answer 1

“Cannibalized” is the term used indicating the reduction of sales because of introducing a new product.

In case of profitability:

Answer: yes; it is profitable.

Before change profit = 280 million × $0.65 = $182 million

After change profit = (6 million × $0.50) + {(280 – 4.2) million × $0.65}

                               = $3 million + (275.8 million × $0.65)

                               = $3 million + $179.27 million

                               = $182.27 million

Since “after change profit” is higher than “before change profit”, the change is profitable for the business.

Cannibalized sales in units = 6 million × 70%

                                           = 4.2 million                                       

Unit contribution if cannibalized = Sales per unit – Variable cost per unit

                                                  = 1.10 – 0.60

                                                = $0.50 (Answer)

Unit contribution if not cannibalized = Sales per unit – Variable cost per unit

                                                       = 0.95 – 0.30

                                                     = $0.65 (Answer)

Loss for cannibalized per unit = 0.65 – 0.50

                                                = $0.15 (Answer)

Note: fixed costs should not be considered here, since this is unavoidable therefore irrelevant.