Assume the company expects to sell 300 million ounces of M&M Premiums within the

Question

Assume the company expects to sell 300 million ounces of M&M Premiums within the first year after introduction but expects that half of those sales will come from buyers who would normally purchase M&M regular candies (that is, cannibalized sales). Assuming the sales of regular M&M candies are normally 1 billion ounces per year and that the company will incur an increase in fixed costs of $5 million during the first year of production for M&M Premiums, will the new product be profitable for the company? Refer to the discussion of cannibalization in Appendix 2: Marketing by the Numbers for an explanation regarding how to conduct this analysis BOOK:Principles of marketting,kOTLER AND ARMTRONG ISBN:13-978-13-308404-7

Explanation / Answer

SINCE THE NEW PRODUCT IS A PREMIUM VERSION SO WE CAN EXPECT THAT IT WILL HAVE A HIGHER CONTRIBUTION AS COMPARED TO THE REGULAR PRODUCT. THIS EXTRA CONTRIBUTION CAN COVER UP THE FIXED COSTS INCURRED. ALSO IT HAS BEEN MENTIONED THAT ONLY HALF OF THE SALES WILL COME FROM THE ORIGINAL CUSTOMERS OR SAY CANNIBALIZED CUSTOMERS.

HENCE IF TH NEW CONTRIBUTION IS MORE AS COMPARED TO THE PREVIOUS CONTRIBUTION THEN THE COMPANY SHOULD INTRODUCE THE NEW PRODUCT AND IT WOULD BEE PROFITABLE, HOWEVER IN CASE OF LOSS IT SHOULD NOT BE INTRODUCED.

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