Question

Turkey Hill Motor Homes currently sells 1,200 Class A motor homes, 2,600 Class C motor homes, and 4,000 pop-up trailers each year. It is considering adding a mid-range camper and expects that if it does so the firm can sell 1,500 of them. However, if the new camper is added, the firm expects its Class A sales to decline by 10 percent while the Class C camper sales decline to 2,100 units. The sales of pop-ups will not be affected. Class A motor homes sell for an average of $162,000 each. Class C homes are priced at $59,500 and the pop-ups sell for $5,500 each. The new mid-range camper will sell for $32,900. What is the erosion cost?

Answer 1

Answer:

The erosion cost = $ 49,190,000

Explanation:

Given:

Class A motor homes sold = 1,200

Class C motor homes sold = 2,600

pop-up trailers sold = 4,000

if the new camper is added,

decline in class A sales = 10%

Decline in class C sales = 2,100 units

Average cost of class A motor homes = $ 162,000

Average cost of class C  homes = $ 59,500

Selling price for the pop-ups = $ 5,500

cost of the new mid-range camper = $ 32,900

Now,

Erosion cost is given as = Total decline in revenue from the sales

= (Decline in class A sales × Average cost of class A motor homes ) + (Decline in class C sales × Average cost of class C motor homes )

Erosion cost = ( 0.10 × 1,200 × $ 162,000 ) + ( (2,600 - 2,100) × $ 59,500 )

or

Erosion cost = 19,440,000 +  29,750,000

or

The erosion cost = $ 49,190,000