Snapple is considering adding a new flavor tea to their product line - an energy drink that tastes like tea. Based on past experience they know that the sales of their current products will be impacted by the introduction of new flavors.
Before launching their new tea, they want to understand the financial implications of cannibalization.
Past research suggests that half of the demand for the new drink will come from the demand for the other products (i.e., cannibalized sales). Consider the following information:
|
Product
|
Selling price
|
Variable cost
|
Demand Forecast
|
Demand lost if new product is launched
|
|
Lemon Tea
|
0.99
|
0.30
|
5000
|
500
|
|
Diet Raspberry Tea
|
0.99
|
0.35
|
6000
|
400
|
|
Cherry Pomegranate Tea
|
0.99
|
0.45
|
2500
|
350
|
|
Energy Tea
|
1.99
|
1.30
|
2000
|
|
1. How much can Snapple expect their sales volume to increase by introducing the new energy drink?
2. What will the increase in revenue likely be?
3. If the fixed costs associated with launching the new drink are $4,000, should Snapple go forward with the launch?