Use the information for the question(s) below.

Food For Less (FFL), a grocery store, is considering offering one hour photo developing in their store. The firm expects that sales from the new one-hour machine will be $150,000 per year. FFL currently offers overnight film processing with annual sales of $100,000. While many of the one-hour photo sales will be to new customers, FFL estimates that 60% of their current overnight photo customers will switch and use the one-hour service.

10) The level of incremental sales associated with introducing the new one-hour photo service

Question

Use the information for the question(s) below.

Food For Less (FFL), a grocery store, is considering offering one hour photo developing in their store. The firm expects that sales from the new one-hour machine will be $150,000 per year. FFL currently offers overnight film processing with annual sales of $100,000. While many of the one-hour photo sales will be to new customers, FFL estimates that 60% of their current overnight photo customers will switch and use the one-hour service.

10) The level of incremental sales associated with introducing the new one-hour photo service

BlackTom AI · Accepted Answer

The scenario asks for the level of incremental sales associated with introducing the new one-hour photo service. To analyze, first note the relevant figures: the new one-hour machine is expected to generate 150,000 in sales per year. The current overnight photo processing has annual sales of 100,000. Of the current overnight customers, 60% are expected to switch to the new one-hour service, which reduces the overnight sales by 0.60 × 100,000 = 60,000. Incremental sales are the net increase in total sales attributable to the new service, calculated as the new sales minus the lost sales from cannibalized existing customers:

- Option A: $90,000 — This reflects 150,000 (new sales) minus 60,000 (cannibalized overnight sales), giving a net incremental increase of 90,000. This matches the standard incremental sales calculation for a project that cannibalizes a portion of existing sales.

- Option B: $150,000 — This would be the gross sales from the new one-hour service alone, not accounting for the loss of existing overnight revenue due to cannibalization. It overstates incremental impact by ignoring cannibalization.

- Option C: $60,000 — This represents the amount of overnight sales that would be lost from cannibalization, not the net incremental sales from introducing the new service.

- Option D: $120,000 — This could be a miscalculation combining values incorrectly (for example, adding the full new sales to the lost cannibalized amount). It does not represent the net incremental effect.

In summary, incremental sales equal the new service sales minus the cannibalized existing service sales, which is 150,000 − 60,000 = 90,000. Therefore, the correct incremental figure is $90,000, while the other options correspond to gross sales, cannibalized losses, or incorrect combinations.

Corporate Finance Homework 2

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