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

The erosion cost is calculated by finding the lost revenue from the decline in sales of Class A and Class C spas. The decline is 300 units for Class A ($75,000 each) and 500 units for Class C ($25,000 each). The erosion cost is (300 * $75,000) + (500 * $25,000) = $22,500,000 + $12,500,000 = $35,000,000.

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