Erosion

costs.

Fat Tire Bicycle Company currently sells

39,000

bicycles per year. The current bike is a standard balloon-tire bike selling for

$110,

with a production and shipping cost of

$25.

The company is thinking of introducing an off-road bike with a projected selling price of

$375

and a production and shipping cost of

$225.

The projected annual sales for the off-road bike are

16,000.

The company will lose sales in fat-tire bikes of

8,000

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?

$nothing

(Round to the nearest dollar.)

Should Fat Tire start producing the off-road bike?(Select the best response.)

A.

Yes, because it contributes an additional $1,720,000 of cash flow.

B.