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5 August, 11:32

Currently, GH Co. sells 42,600 handbags annually at an average price of $149 each. It is considering adding a lower-priced line of handbags that sell for $79 each. The firm estimates it can sell 21,000 of the lower-priced handbags but expects to sell 7,200 less of the higher-priced handbags by doing so. What is the amount of the annual sales that should be used when evaluating the addition of the lower-priced handbags?

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  1. 5 August, 14:40
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    Incremental sales = $586,100

    Explanation:

    Giving the following information:

    It is considering adding a lower-priced line of handbags that sell for $79 each. The firm estimates it can sell 21,000 of the lower-priced handbags but expects to sell 7,200 less of the higher-priced handbags by doing so.

    We need to consider not only the incremental sales of the lower-priced but also the decrease in the higher-priced handbags.

    Low-priced = 21,000*79 = $1,659,000

    Canibalized sales = 7,200*149 = (1,072,900)

    Incremental sales = $586,100
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