Question

SUV Company is considering producing a line of luxury SUVs. Currently, SUV Company sells 4,200 standard SUVs annually for $45,400 each. They expect that they would sell 5,600 luxury SUVs for $80,500. If SUV Company produces the line of luxury SUVs, then they expect to only sell 3,300 standard SUVs. What is the incremental revenue generated from the potential project

Answer 1

Answer:

SUV Company

The incremental revenue generated from the potential project is:

= $409,940,000.

Explanation:

a) Data and Calculations:

Selling price of Standard SUVs = $45,400

Number of Standard SUVs sold annually = 4,200

Luxury SUVs' price per unit = $80,500

Number of Luxury SUVs expected to be sold = 5,600

Reduced number of Standard SUVs sold as a result = 3,300

Lost sales of Standard SUVs = 900 (4,200 - 3,300)

The incremental revenue generated from the potential project is:

Sale revenue from Luxury SUVs = $450,800,000 ($80,500 * 5,600)

Lost revenue from lost sale of

 Standard SUVs =                                40,860,000 ($45,400 * 900)

Incremental revenue generated = $409,940,000

b) The incremental revenue is the additional revenue generated from the introduction of the Luxury SUVs, excluding the lost revenue from the non-sale of Standard SUVs as a result of the introduction.