Jenna's Home Spa Sales currently sells 2,000 Class A spas, 5,000 Class C spas, and 1,000 deluxe model spas each year. Jenna is considering adding a mid-class spa and expects that if she does she can sell 2,500 of them. However, if the new spa is added, Jenna expects that her Class A sales will decline to 1,700 units while the Class C sales decline to 4,500. The sales of the deluxe model will not be affected. Class A spas sell for an average of $75,000 each. Class C spas are priced at $25,000 and the deluxe model sells for $100,000 each. The new mid-range spa will sell for $50,000. What is the erosion cost?

Question

Quizplus · Accepted Answer

Erosion cost is calculated by determining the loss in sales of existing products due to the introduction of a new product. Here, Class A sales decline by 300 units (from 2,000 to 1,700), and Class C sales decline by 500 units (from 5,000 to 4,500). The erosion cost is calculated as follows: (300 units * $75,000) + (500 units * $25,000) = $22,500,000 + $12,500,000 = $35,000,000.

Jenna's Home Spa Sales Currently Sells 2,000 Class a Spas