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P10-1 (similar to) Question Help Erosion costs. Fat Tire Bicycle Company currently sells 36,000 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 $380 and production and shipping cost of $225 The projected annual sales for the off-road bike are 13,000. The company will lose sales in fot 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? What is the erosion cost from the new bike? (Round to the nearest dollar) CO: View an Example bing acte he he un Question Help Erosion costs. Fat Tire Bicycle Company currently sells 40,000 bicycles per year. The current bike is a standard balloon-tire bike selling for $90, with a production and shipping cost of $35. The company is thinking of introducing an off-road bike with a projected selling price of $410 and a production and shipping cost of $360. The projected annual sales for the off-road bike are 12,000. The company will lose sales in fat-tire bikes of 8,000 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? The erosion cost can be found by subtracting the production and shipping cost from the selling price and multiplying the result by the lost sales as a result of the new product: erosion cost = (price - production and shipping cost) x lost sales in units = ($90 - $35)*8,000 = $440,000 Follow the steps below to determine whether Fat Tire should start producing the off-road bike: I Step1: Calculate the net annual cash flow (NACF) with the standard bike. NACF with standard bike = (price - production and shipping cost) x sales in units = ($90 - $35) 40,000 = $2,200,000 Step 2: Calculate the NACF with both the standard bike and the new off-road bike. Be sure to account for the erosion of sales of the standard bike that will result because of the introduction of the new off-road bike. Press Continue to see more. Continue Close 2 parts remaining rojecte s the Question Help s the Erosion costs. Fat Tire Bicycle Company currently sells 40,000 bicycles per year. The current bike is a standard balloon-tire bike Rounselling for $90, with a production and shipping cost of $35. The company is thinking of introducing an off-road bike with a projected selling price of $410 and a production and shipping cost of $360. The projected annual sales for the off-road bike are 12,000 The company will lose sales in fat-tire bikes of 8,000 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? NACF with standard bike = (price - production and shipping cost)x sales in units = ($90 - $35) x 40,000 = $2,200,000 Step 2: Calculate the NACF with both the standard bike and the new off-road bike. Be sure to account for the erosion of sales of the standard bike that will result because of the introduction of the new off-road bike. NACF with both bikes = (NACF with standard bike - erosion cost) + (price of off-road bike - production and shipping cost of off-road bike) sales of off-road bike = ($2,200,000 - $440,000) + ($410 - $360) 12,000 = $2,360,000 Step 3: Calculate the incremental net annual cash flow, assuming the introduction of the new off-road bike. incremental NACF NACF with both bikes - NACF with standard bike = $2,360,000 - $2,200,000 = $160,000 Antinenta con mare ho co View an Example ping act che Question Help Erosion costs. Fat Tire Bicycle Company currently sells 40,000 bicycles per year. The current bike is a standard balloon-tire bike Dun selling for $90, with a production and shipping cost of $35. The company is thinking of introducing an off-road bike with a projected selling price of $410 and a production and shipping cost of $360. The projected annual sales for the off-road bike are 12,000. The company will lose sales in fat-tire bikes of 8,000 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? =($40 - 335) 40,000 = $2,200,000 Step 2: Calculate the NACF with both the standard bike and the new off-road bike. Be sure to account for the erosion of sales of the standard bike that will result because of the introduction of the new off-road bike. NACF with both bikes = (NACF with standard bike erosion cost) + (price of off-road bike - production and shipping cost of off-road bike)x sales of off-road bike = ($2,200,000 - $440,000) + ($410 - $360) x 12,000 = $2,360,000 Step 3: Calculate the incremental net annual cash flow, assuming the introduction of the new off-road bike. incremental NACF = NACF with both bikes - NACF with standard bike = $2,360,000 - $2,200,000 = $160,000 If the incremental annual cash flow is positive, as a result of introducing the off-road bike, then the bike should be introduced. Thus, the off-road bike should be manufactured because it contributes an additional $160,000 Question is complete

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