Question
Erosion costs. Ice Cream City plans to introduce a new flavor, wild berry, to its current set of five flavors, which include vanilla, French vanilla,
Erosion costs. Ice Cream City plans to introduce a new flavor, wild berry, to its current set of five flavors, which include vanilla, French vanilla, strawberry, chocolate, and mint chocolate. The new sales of wild berry are projected as follows:
| Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 |
| Sales | $130,000 | $145,000 | $167,000 | $192,000 | $210,000 | $230,000 | $235,000 | $230,000 | $230,000 |
The expected sales will come from both new customers and current customers who switch flavors. The current projected sales for the existing flavors (assuming no introduction of the new flavor) are
Projected Sales
| Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 |
| Vanilla | $300,000 | $300,000 | $300,000 | $320,000 | $320,000 | $320,000 | $350,000 | $350,000 | $350,000 |
| F-Van | $105,000 | $110,000 | $115,000 | $115,000 | $115,000 | $120,000 | $120,000 | $120,000 | $120,000 |
| Straw | $230,000 | $235,000 | $245,000 | $250,000 | $260,000 | $270,000 | $280,000 | $290,000 | $300,000 |
| Choc | $320,000 | $330,000 | $340,000 | $350,000 | $360,000 | $360,000 | $360,000 | $360,000 | $360,000 |
| M-Choc | $160,000 | $165,000 | $170,000 | $170,000 | $175,000 | $175,000 | $180,000 | $180,000 | $185,000 |
However, if the company introduces wild berry, it will cut into the sales of the original flavors based on the following estimates:
Percentage of Sales Erosion
| Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 |
| Vanilla | 0.05 | 0.05 | 0.04 | 0.04 | 0.03 | 0.03 | 0.02 | 0.02 | 0.01 |
| F-Van | 0.025 | 0.025 | 0.02 | 0.01 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Straw | 0.45 | 0.40 | 0.35 | 0.30 | 0.25 | 0.25 | 0.25 | 0.25 | 0.25 |
| Choc | 0.15 | 0.10 | 0.05 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| M-Choc | 0.025 | 0.02 | 0.01 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Here are the revenue and cost per unit of ice cream for Ice Cream City:
Vanilla: current revenue of $3.05 per unit and cost of $1.22 per unit
French vanilla: current revenue of $3.15 per unit and cost of $1.38 per unit
Strawberry: current revenue of $3.25 per unit and cost of $1.41 per unit
Chocolate: current revenue of $3.25 per unit and cost of $1.57 per unit
Mint chocolate: current revenue of $3.25 per unit and cost of $1.63 per unit
Wild berry: projected revenue of $3.25 per unit and cost of $1.44 per unit
Find the annual erosion of revenue, the cost savings, and the net cash flow with the new ice cream.
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Audit Proof Tax Shelters
Authors: Donald Jay Korn
1st Edition
0130509310, 978-0130509314
