Cannibalization Questions

Homework Cannibalization Dr. Woodham Instructions: This is a team assignment. Please do all problems by yourself and compare answers with your teammates. Then submit one copy in the File Exchange folder. Please use Excel for this so that you can catch and fix mistakes easily along the way, and so you get practice using the software. Total points: 100 1. Men’s USA sells vintage-styled long suits, otherwise known as zoot suits. They have three zoot suit models: the Apple, MellowFelt, and the Gumdrop. The prices of the models are: $305, $435, and $549, respectively. The variable costs for these models are: $95, $125, and $155, respectively. The demand projected for each model for next year are: 11,750, 8,270, and 7,150 units. Suppose they are now considering the addition of another product called the “World Series” priced at $370 with a variable cost of $110. Men’s USA expects that they will sell 4,500 units of the new product next year. Forty-eight percent of the sales will be from cannibalization: 10% from the Apple, 18% from the MellowFelt, and 20% of the volume will be from the Gumdrop. The other 52% will come from market growth and competitors. The marketing costs for the World Series will be $64,000 and design costs will be $20,000. a. Should Men’s USA launch the World Series? Show your calculations. [10] b. Suppose that in year 2, sales of the Apple, MellowFelt, and the Gumdrop increase by 10%, 15%, and 12%, respectively. If the World Series was launched in the first year, then it is expected that the demand in the second year will increase to 4,750 units. Marketing costs in the second year for the World Series will be $55,000. Assuming that cannibalization rates remain the same, would your decision from part (a) change? [10] Homework Cannibalization Dr. Woodham 2. Herb Co now sells two loose leaf teas that are to help people to recover from respiratory illnesses. They are the “Cold and Flu Brew” and the “Breathe Easy”. Each of these teas are sold in two package sizes: ¼ pound and 1 pound. The Cold and Flu Brew sells for $12.29 and $27.32 respectively, and the Breathe Easy sells $13.59 and $30.07 respectively. The variable cost of producing Cold and Flu Brew is $0.35 per ounce, and for Breathe Easy, it is $0.50 per ounce. According to their forecast, they will sell 6,000 quarter pound and 9,500 one-pound packages of Cold and Flu Brew. They expect to sell 5,000 quarter pound and 7,000 onepound packages of Breathe Easy next year. The management team is considering the launch of a new tea called Echinacea Root priced at $17.52 (quarter pound) and $38.93 (pound) with a variable cost of $0.75 per ounce. They forecast selling 4,000 quarter pound and 2,000 one-pound packages in the first year. Fifty percent of both package size sales are expected to be incremental demand. Of the quarter pound packages, 20% is expected to come from cannibalizing Cold and Flu Brew sales and the remaining 30% is expected to come from Breathe Easy sales. However, for the pound packages, 15% is expected to come from the Cold and Flu Brew, and 35% is expected to come from the Breathe Easy. If they launch Unleaded, they will need to spend $20,000 to set up the supply chain for those ingredients and about $10,000 in promotion in tea-related magazines. (Hint: 16 ounces = 1 pound. VC for the respective package sizes). Please show calculations (create formulas in Excel) to answer the following: a. Should Herb Co. launch the? [10] b. In year two, (without the Echinacea Root) sales of Cold and Flu Brew are expected to increase by 20% and Breathe Easy will increase by 10%. They expect that Echinacea Root will become more popular and they can increase the price to $18.65 per quarter pound and $39.65 per one-pound package. The forecast is for 6,000 quarter pound and 5.000 packages of Echinacea Root in year two, and the cannibalization rates are expected to be the same as year 1. To achieve that volume of Unleaded, they expect that promotion will cost $30,000 in year two. Considering both years, should they launch it? [10] Homework Cannibalization Fantasque Price: $405 Coeur Fou Price: $320 Dr. Woodham L’Interdit Rouge Price: $99 3. Givenchy is a brand that specializes in luxury fragrances. Three of their most expensive fragrances for women are displayed above. The variable costs incurred to make each of these fragrances are: $60 (Fantasque), $42 (Coeur Fou), and $25 (L’Interdit Rouge). The sales forecasted for each of these fragrances for next year are: 24,500, 47,000, and 95,000, respectively. Proposed addition: L’Interdit Noir Price: $120 Suppose that next year they are thinking about adding a new fragrance called the L’Interdit Noir, which will be priced at $120 (with variable costs of $35). If they launch the L’Interdit Noir, it is forecasted to sell about 55,000 units next year. They would incur some fixed costs such as design $10,000 and promotional costs of $30,000. Forty percent of the L’Interdit Noir volume is incremental, while 36% of the volume would be cannibalized from the L’Interdit Rouge, 16% from the Coeur Fou, and 8% from the Fantasque. a. Should Givenchy launch the L’Interdit Noir? [10] b. In the second year, they forecast that the demand for Fantasque will increase by 15%, the Coeur Fou’s demand will increase by 20%, and the L’Interdit Rouge’s demand will increase by 10%. If they launched the L’Interdit Noir, they forecast selling 85,500 units. In the second year, the promotional spending for the L’Interdit Noir will be $30,000. Assuming Homework Cannibalization Dr. Woodham the cannibalization rates decrease to 25% from the L’Interdit Rouge, 10% from the Coeur Fou, and 2% from the Fantasque, considering both years, should they have launched the L’Interdit Noir? [10] c. Suppose that they are considering using coupons for the new fragrance instead of traditional advertising in the second year. Assume that the other fragrances would grow as stated in Part b of this problem. If they had launched the new one, they forecast selling 85,000 units with a $15 coupon and another 65,000 units at full price. Twenty-five percent of the couponed L’Interdit Noir will be cannibalized volume from L’Interdit Rouge, and 5% will come from the Coeur Fou. Of the full-priced volume, 10% will come from the L’Interdit Rouge and 5% will come from the Coeur Fou, and 1% from the Fantasque. Based on these numbers over the two years, would Givenchy be better off without the L’Interdit Noir, with it and advertised as in part b, or with it and running the coupon as in this part of the question? [10] Purple Pearlz Price: $128 Arctic Blue Price: $267 Swarovski Price: $469 4. Fashionable canes specializes in canes that make a statement. Three of their top selling canes are displayed above. The variable costs incurred to make each of these canes are: $45 (Purple Pearlz), $80 (Arctic Blue), and $150 (Swarovski). The sales forecasted for each of these canes for next year are: 1,900, 2,800, and 1,400, respectively. Lionhead Price: $349 Suppose that next year they are thinking about adding a new cane called the Lionhead, which will be priced at $349 (with variable costs of $110). If they launch the Lionhead, it is forecasted to sell about 2,000 units next year. They would incur some fixed costs such as design $10,000 and promotional costs of $20,000. Forty percent of the Lionhead volume is incremental, while 30% of the volume would be cannibalized from the Swarovski, 25% from the Arctic Blue, and 5% from the Purple Pearlz. Homework Cannibalization Dr. Woodham a. b. Should Fashionable Canes launch the Lionhead? [10] In the second year, they forecast that the demand for Purple Pearlz will increase by 15%, the Arctic Blue’s demand will increase by 20%, and the Swarovski’s demand will increase by 25%. If they launched the Lionhead, they forecast selling 2,500 units. In the second year, the promotional spending for the Lionhead will be $30,000. Assuming the cannibalization rates for the second year will be 20% coming from the Swarovski, 15% from the Arctic Blue and 3% from the Purple Pearlz, would your decision change considering both years? [10] c. Suppose that for year 2, the growth rates are as in part b, but the company offered a $25 coupon to increase the sales of the new Lionhead cane. Assume that the discounted Lionhead volume will be 2,000 units, and the full-priced volume will be 1,500 units. Also, 25% of the discounted volume will come from the Arctic Blue and 5% from the Purple Pearlz, with the rest being incremental volume. Of the full-priced volume, 10% will come from the Swarovski and the rest will be incremental volume. Based on both years, would you offer the coupon, offer it full-priced, or not at all? [10]

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