Taste Good Chocolates develops a new candy bar and plans to sell each bar for $1

Question

Taste Good Chocolates develops a new candy bar and plans to sell each bar for $1.
Taste Good predicts that 1 million candy bars will be sold in the first year if the new
candy bar is produced and sold, and includes $1 million of incremental revenues in
its capital budgeting analysis. A senior executive in the company believes that 1 million
candy bars will be sold, but lowers the estimate of incremental revenue to
$700,000. What would explain this change?

a. excessive marketing costs to sell the 1 million candy bars
b. a lower discount rate
c. cannibalization of 300,000 of Taste Good Chocolates’ other candy bars
d. a higher selling price for the new candy bars

JW Enterprises is considering a new marketing campaign that will require the addition
of a new computer programmer and new software. The programmer will occupy an
office in JW’s current building and will be paid $8,000 per month. The software
license costs $1,000 per month. The rent for the building is $4,000 per month. JW’s
computer system is always on, so running the new software will not change the
current monthly electric bill of $900. The incremental expenses for the new marketing
campaign are:

a. $8,000 per month.
b. $13,000 per month.
c. $13,900 per month.
d. $9,000 per month.

Explanation / Answer

C Introduction of a new bar will cause a reduction in sales of the old bars as some people will switch. D The only additional (incremental) costs will be the programmers salary and the software license ($8K +$1K= $9K).

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