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.

11) Suppose that of the 60% of FFL's current overnight photo customers, half would start taking their film to a competitor that offers one-hour photo processing if FFL fails to offer the one-hour service. The level of incremental sales in this case is closest to:

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.

11) Suppose that of the 60% of FFL's current overnight photo customers, half would start taking their film to a competitor that offers one-hour photo processing if FFL fails to offer the one-hour service. The level of incremental sales in this case is closest to:

BlackTom AI · Accepted Answer

We start by restating the key data and what is being asked, then walk through each option with careful reasoning.

Question and options:
- There is an existing overnight photo processing business with annual sales of $100,000.
- The proposed one-hour photo service is expected to generate $150,000 in annual sales.
- Of the current overnight customers, 60% are expected to switch to the one-hour service if it is offered.
- In the scenario provided, of that 60%, half would switch to a competitor offering one-hour processing if FFL does not offer the one-hour service.
- The question asks for the level of incremental sales in this case, choosing among $120,000, $90,000, $150,000, and $60,000.

Step 1: Interpret the baseline and the impact of offering the one-hour service
- Baseline annual sales from overnight processing: $100,000 (current situation without the one-hour option).
- If FFL offers the one-hour service, total annual sales from the one-hour option are expected to be $150,000.
- Of the current overnight customers, 60% would switch to the one-hour service if offered. This portion of revenue is 0.60 × $100,000 = $60,000 that would come from the switched customers under the one-hour offering.

Step 2: Distinguish what incremental sales mean here
- Incremental sales relative to the current baseline (no one-hour service) are the additional dollars that the store would gain due to offering one-hour service.
- The portion of the $150,000 that corresponds to customers who would switch from overnight is $60,000; this is not incremental beyond the baseline, because those customers would be served by FFL in the baseline if the one-hour service is not considered? Actually, with the one-hour option, those $60,000 are brought to the one-hour service instead of staying with overnight, so they are part of the incremental shift.
- The remaining portion of the $150,000 (i.e., $150,000 − $60,000 = $90,000) would be new customers who would not have used overnight at the baseline; thus, this is incremental sales attributable to newly captured demand.

Step 3: Incorporate the competing option caveat (half would switch to a competitor if FFL fails to offer)
- If FFL does NOT offer the one-hour service, 60% of overnight customers would consider switching. Of this 60%, half would switch to a competitor offering one-hour processing. That means 0.5 × 0.60 × $100,000 = $30,000 of the potential overnight revenue would be lost to the competitor in the absence of offering.
- Therefore, by offering the one-hour service, FFL not only gains its own $60,000 of the 60% that would switch, but it also avoids a potential $30,000 loss to the competitor when not offering the service. In other words, the incremental value relative to the scenario of not offering is the sum of the $90,000 (new customers) plus the avoided $30,000 loss plus the $60,000 from the switching segment? Careful: the $60,000 that would switch to the one-hour service when offered is part of the total $150,000; the avoided loss of $30,000 occurs when comparing the with-offer versus no-offer scenarios, effectively increasing incremental impact beyond the base $90,000.
- Combining these considerations yields an approximate incremental level near $120,000 in this case (the $90,000 base incremental from new demand plus an additional $30,000 reflecting avoided competitor loss when the service is offered).

Step 4: Evaluate each option against the above reasoning
- $120,000: This aligns with the combined effect of $90,000 in new incremental sales plus an additional $30,000 related to avoiding the competitor loss under the given scenario.
- $90,000: This captures only the immediate new incremental demand ($150,000 total minus the $60,000 that would switch) but ignores the compensating effect of the avoided competition loss described in the scenario.
- $150,000: This would treat the full one-hour sales as incremental with no deduction for overlapping with current overnight customers or for the competitor risk; it double-counts the switched portion without recognizing the baseline and the no-offer counterfactual.
- $60,000: This reflects only the revenue from the portion of current overnight customers that switch to the one-hour service, but it omits the additional incremental new customers and the avoided loss component when the offer is made.

Step 5: Summary judgment on the provided scenario
- The most consistent figure with the described dynamics (new incremental demand plus the benefit of preventing competitor losses) is approximately $120,000.

Note: Throughout this analysis, I treated incremental sales as the additional revenue attributable to offering the one-hour service, after accounting for which portion would switch and how much risk of losing customers to competitors is mitigated by offering the service. The reasoning intentionally incorporates the given scenario about competitor behavior to refine the incremental estimate.

Corporate Finance Homework 2

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