Question
In: Finance
Fat Tire Bicycle Company currently sells 37,000 bicycles per year. The current bike is a standard...
Fat Tire Bicycle Company currently sells 37,000 bicycles per year. The current bike is a standard balloon-tire bike selling for $100, with a production and shipping cost of $25. The company is thinking of introducing an off-road bike with a projected selling price of $370 and a production and shipping cost of $225. The projected annual sales for the off-road bike are 15,000. The company will lose sales in fat-tire bikes of 10,000 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?
Solutions
Expert Solution
Requirement – (1), Erosion cost from the new bike
Erosion cost from the new bike = lose sales in fat-tire bikes per year x (Selling price per unit – Shipping cost per unit)
= 10,000 units x ($100 per unit - $25 per unit)
= 10,000 units x $75 per unit
= $750,000
Requirement - (2)
Net Cash flow with standard balloon-tire bike
Net Cash flow from standard balloon-tire bike = $27,75,000 [37,000 units x ($100 per unit - $25 per unit)]
Net Cash flow with standard balloon-tire bike and the off-road bike
Cash flow from standard balloon-tire bike = $20,25,000 [(37,000 units – 10,000 units) x ($100 per unit - $25 per unit)]
Cash flow from off-road bike = $21,75,000 [15,000 units x ($370 per unit - $225 per unit)]
Net Annual cash flow = Cash flow from standard balloon-tire bike + Cash flow from off-road bike
= $20,25,000 + $21,75,000
= $42,00,000
Therefore, the Increase in Net Cash flow per year = $42,00,000 - $27,75,000
= $14,25,000
DECISION
“YES”. The Fat Tire Bicycle Company should start producing the off-road bike, since would increase the cash flows by $14,25,000 per year.
jeff jeffy answered 1 year agoRelated Solutions
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