Calculate and show post-cannibalization profit

Assignment Help Accounting Basics

Reference no: EM131876784

Assignment: Note: Make sure you read helpful hints and guidance at the end. Also, a spreadsheet Excel file has been provided for you to build your profit and loss (P&L) statements and to compute your cannibalization calculations.

Calculate answers to at least three decimal places except for unit calculations, which should be rounded up to the next full unit.

1. Using the data provided, create Year 1 and Year 2 P&L statements for the niche and mainstream positioning strategies. Your P&L should include the following items:

a. Unit volume

b. Revenue

c. Variable cost

d. Variable margin: total and per unit

e. Fixed costs (detail what should be included here)

f. Profit (pre-cannibalization)

Under either positioning strategy, the introduction of the new bat will have an impact on sales of Kookaburra's current products. Estimating cannibalization is an inexact science, but volume testing and past experience indicate that the company should expect a cannibalization rate of approximately 22 percent if it pursues the niche strategy and of approximately 32 percent if it pursues the mainstream strategy. A "cannibalization rate" represents the percentage of new product unit sales that will be taken from sales of the current product(s). Kookaburra expects units on existing products to be lost proportionally to the current Kahuna-to-Blade sales ratio. When calculating the cost of cannibalization, it is traditional to value units lost at the average unit contribution of the current products.

2. Create a chart of Year 1 and Year 2 cost and impact of cannibalization. Assume that no reductions (or increases) in fixed spending for the current Kahuna and Blade business will occur as part of the new product launch. In your chart:

KELLOGG SCHOOL OF MANAGEMENT 3

KOOKABURRA CRICKET BATS KEL684

a. Show pre-cannibalization profit from 1(f).

b. Calculate and show the number of units lost from the base business.

c. Calculate and show the value of lost units.

d. Calculate and show post-cannibalization profit.

3. Given these calculations, which positioning strategy would you choose?

4. Is there any cannibalization rate that would result in the niche strategy reaching break-even or positive profit in Year 1? What is the break-even cannibalization rate for the niche option in Year 2? (In other words, what cannibalization rate would have to occur to make zero profit in Year 2 alone, not in Year 1 and Year 2 cumulatively?)

Notes: • The data in the exercise is not comprehensive; for example, subtracting variable cost and A&P from net sales (revenue) will not yield an operating profit of Rs. 15,413,000. This is not a mistake; it simply means that Kookaburra has other fixed costs that are not listed.

• Some of the data in the description may not be needed to complete the assignment; for example, depreciation has been calculated for you in the exercise. A P&L statement does not include the full investment cost of capital assets such as plant and equipment; instead, it includes depreciation, through which the full cost of these assets is reflected in the P&L as the assets are used up over their useful lives.

• It is not necessary to calculate separate unit contributions for Kahuna and Blade. (More importantly, the exercise does not provide the data necessary to do it.)

Information related to above question is enclosed below:

Attachment:- pdf.rar

Reference no: EM131876784

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