Chapter 9, Problem 9.1C

Summary Introduction

To find: The amount to be utilized as annual sales at the time of evaluating the project.

Introduction:

The relevant cash flow comes under the incremental cash flow, which is helpful in decision-making for a project. Thus, a variation in the total future cash flows of a firm that is from the direct outcome of the choice to take a project is the relevant cash flow.

Answer to Problem 9.1C

The annual sales is $912,830,000.

Explanation of Solution

Given information:

Company W sells 29,200 motor homes for a year at $79,000 each. The luxury motor coaches are sold at $121,000 each and the total number of luxury motor coaches is 8,200. The company wishes to introduce a new portable camper for $25,000 each to fill its new product line and it plans to sell out 24,200 campers.

An independent consultant finds that if Company W brings in the new campers then it must increase its sale of the current motor homes by 3,800 units for a year and must decrease the sales of the motor coaches by 970 units for a year.

Compute the sales due of the new product line:

$\begin{array}{c}\text{Sales due of the new product line}=29,200(\$25,000)\\ =\$730,000,000\end{array}$

Note: The sales due of the new product line is computed by multiplying the number of the planned new product with their price.

Hence, the sales due of the new product line is $730,000,000.

Compute the relevant new sales:

$\begin{array}{c}\text{New sales}=3,800\times \$79,000\\ =\$300,200,000\end{array}$

Note: The increase in the motor home sales takes place because of the introduction of the new cash flow, thus the calculation of the relevant new sales is important. The relevant new sales are calculated by multiplying the price of the motor homes and the number of motor homes that the company has to boost up.

Hence, the new sales is $300,200,000.

Compute the loss in motor coaches sales:

$\begin{array}{c}\text{Loss in motor coaches sales}=970\times \$121,000\\ =\$117,370,000\end{array}$

Note: The erosion of the luxury motor coaches sales is payable to the new product, thus it is necessary to calculate the loss in sales. The loss in sales is calculated by multiplying the price per motor coach with the number of units that must be decreased in the motor coaches.

Hence, the loss in motor coaches is $117,370,000.

Formula to calculate the net sales of the new product:

$\text{Net sales of the new product}=\text{Sales due of the new product line}+\text{New sales}-\text{Loss in sales}$

Compute the net sales of the new product:

$\begin{array}{c}\text{Net sales of the new product}=\text{Sales due of the new product line}+\text{New sales}-\text{Loss in sales}\\ =\text{\$730,000,000}+\text{\$300,200,000}-\$117,370,000\\ =\$912,830,000\end{array}$

Hence, the annual sales or the net sales of the new product is $912,830,000.