Question

Aspen Recreation Company sells three products today. The first product is called the Apache Classic Dunebuggy and they sell 400 units each year. The second product is called the Apache Basic Dunebuggy and they sell 550 units each year. The third product is called the Apache Deluxe Dunebuggy and they sell 300 units per year. Aspen Recreation is thinking about launching a fourth product called the Apache Gen Z Dunebuggy. If they launch this Gen Z Dunebuggy, they expect to be able to sell 475 units annually. But, if they launch the Gen Z Dunebuggy, there will be impacts on their current products. The Apache Classic Dunebuggy will have a sales decline to 275 units each year. The Apache Basic Dunebuggy will have an expected sales increase to 575 per year. There will be no change in the sales of the Apache Deluxe Dunebuggy. The selling price for the Apache Classic Dunebuggy is $13,900 each. The selling price for the Apache Basic Dunebuggy is $7,000 each. The selling price for the Apache Deluxe Dunebuggy is $18,000 each. The proposed new Apache Gen Z Dunebuggy is expected to sell for $9,000 each. For purposes of analyzing the costs and benefits of potentially launching this new product, the Apache Gen Z Dunebuggy, what is the appropriate annual amount of sales you should use in your analysis?

Answer 1

For purposes of analyzing the costs and benefits of potentially launching this new product, impact of sales on the existing products due to the launch of the new product needs to be adjusted in the annual amount of sales of the new product.

Step 1:Sales of new product

Sales of new product, Apache Gen Z Dunebuggy = Selling Units * Selling price per unit = 475*$9,000 = $4,275,000

Step 2: Impact of sales on the existing products due to the launch of the new product

Product Type	Original Sales Units (A)	Revised Sale Units (on launch of new product) (B)	Differential Sale units (on launch of new product) (C) = (B)-(A)	Selling Price per unit (D)	Differential Sales Value (on launch of new product) (E) = (C) * (D)
Apache Classic Dunebuggy	400	275	(125)	13,900	(1,737,500)
Apache Basic Dunebuggy	550	575	25	7,000	175,000
Apache Deluxe Dunebuggy	300	300	-	18,000	-
Total					(1,562,500)

Thus, Impact of sales on the existing products due to the launch of the new product = -$1,562,500 (Total of (E) above).

Step 3: Appropriate annual amount of sales of the new product

As mentione above, for purposes of analyzing the costs and benefits of potentially launching this new product, impact of sales on the existing products due to the launch of the new product needs to be adjusted in the annual amount of sales of the new product.

Thus, Appropriate annual amount of sales of the new product = Sales of new product-Impact of sales on the existing products due to the launch of the new product = $4,275,000-$1,562,500 = $2,712,500