Question 3 (25 marks)

Wilson's Leather Goods currently sells short leather jackets for $250 each. They are considering selling long coats also. The coat would sell for $425 each and the company expects to sell 1,600 a year. If they carry the long coat, management feels that their sales of the short jacket will decline by 350 units. Variable costs on the jacket are $99 each and $270 each on the long coat. The incremental annual fixed costs related to the long coat are $90,000 and the first years depreciation related to the long coat is $12,000. The tax rate is 34 percent. What is the projected operating cash flow for year one of this project?

In a brief paragraph, explain why it is important for a marketing manager to account for the loss of sales (cannibalization) when conducting a financial analysis.