Erosion costs. Fat Tire Bicycle Company currently sells 39 comma 000 bicycles per year. The current bike is a standard balloon-tire bike selling for $120 , with a production and shipping cost of $35. The company is thinking of introducing an off-road bike with a projected selling price of $375 and a production and shipping cost of $250. The projected annual sales for the off-road bike are 17 comma 000. The company will lose sales in fat-tire bikes of 9 comma 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?

Question

Laurel Valenzuela

Business

1 October, 16:24

Erosion costs. Fat Tire Bicycle Company currently sells 39 comma 000 bicycles per year. The current bike is a standard balloon-tire bike selling for $120 , with a production and shipping cost of $35. The company is thinking of introducing an off-road bike with a projected selling price of $375 and a production and shipping cost of $250. The projected annual sales for the off-road bike are 17 comma 000. The company will lose sales in fat-tire bikes of 9 comma 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?

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Orion Zamora · Answer 1

Erosion cost from the new bike is equal to the profit lost from existing bike

= 9,000 x (120 - 35)

= $765,000

Benefit from new bike = 17,000 x (375 - 250)

= $2,125,000

Net Benefit = $2,125,000 - $765,000

= $1,360,000

Since there is net benefit from new bike, Fat Tire should start producing the off-road bike