Cool Comfort currently sells 300 Class A spas, 450 Class C spas, and 200 deluxe

Question

Cool Comfort currently sells 300 Class A spas, 450 Class C spas, and 200 deluxe model spas each year. The firm is considering adding a mid-class spa and expects that if it does it can sell 375 of them. However, if the new spa is added, Class A sales are expected to decline to 225 units while the Class C sales are expected to decline to 200. The sales of the deluxe model will not be affected. Class A spas sell for an average of $12,000 each. Class C spas are priced at $6,000 and the deluxe model sells for $17,000 each. The new mid-range spa will sell for $8,000. What is the value of the erosion?
A. $600,000
B. $1,200,000
C. $1,800,000
D. $2,400,000
E. $3,900,000

Explanation / Answer

Reduction in class A sales =(300 - 225)*$12,000 = $900,000 Reduction in class C sales =(450 - 200)*$6,000 = $1,500,000 Total erosion =$900,000 + $1,500,000 =$2,400,000 Answer D. $2,400,000

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