Erosion costs. Fat Tire Bicycle Company currently sells 39,000 bicycles per year. The current bike is a standard balloon-tire bike selling for $120, with a production and shipping cost of $25.

The company is thinking of introducing an off-road bike with a projected selling price of $370 and a production and shipping cost of $300. The projected annual sales for the off-road bike are 14,000.

The company will lose sales in fat-tire bikes of 7,500 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?

1. What is the erosion cost from the new bike?

2. Should Fat Tire start producing the off-road bike?