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Erosion costs. Fat Tire Bicycle Company currently sells bicycles per year. The current bike is a standard​ balloon-tire bike selling for ​$​, with a production and shipping cost of ​$. The company is thinking of introducing an​ off-road bike with a projected selling price of ​$ and a production and shipping cost of ​$. The projected annual sales for the​ off-road bike are . The company will lose sales in​ fat-tire bikes of 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? What is the erosion cost from the new​ bike?

Respuesta :

Answer:

A. $1,725,000

B. Yes

Explanation:

Calculation for the erosion cost from the new​ bike

First step to find the erosion cost

Using this formula

Erosion cost =(Sales-Production and shipping cost )*Loss of sales units per year

Let plug in the formula

Erosion cost=(100-40)*7,500

Erosion cost=60*7,500

Erosion  cost= $450,000

Second step is to calculate for the Net annual Cash flow using this formula

Net annual cash flow= (Projected selling price-Production and shipping cost)*Projected annual sales-Erosion cost

Let plug in the formula

Net annual cash flow= (370-225)*15,000 - 450,000

Net annual cash flow =145*15,000-450,000

Net annual cash flow =2,175,000-450,000

Net annual cash flow=$1,725,000

B.Yes Fat Tire start producing the​ off-road bike

Because the net annual cash flow is positive