Question
A company has a product called Product X and is considering launching a new product called Product Y. If they launch Product Y, 10% of
A company has a product called Product X and is considering launching a new product called Product Y. If they launch Product Y, 10% of customers who currently buy product X are expected to stop buying Product X and buy Product Y instead. Currently, the company sells about 40,000 Product X's each year, and each unit has a contribution margin of $38. The company has enough excess production capacity to produce Product Y, but would have to hire a new product line supervisor for $57,000 per year to oversee Product Y. The following estimates all pertain to product Y:
Total estimated sales (units): 11,000 per year
Selling price per unit: $35.00
Variable cost per unit: $9.00
What is the estimated incremental annual cash flow associated with launching Product Y (i.e., how much do you expect cash flows to increase or decrease if Product Y is launched)? (Indicate an increase in cash flows as a positive number and a decrease as a negative number.)
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