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Homework answers / question archive / Bob jitters owner of Virtual buzz Coffee "House is in a quandary
Bob jitters owner of Virtual buzz Coffee "House is in a quandary. Many customers have expressed disappointment that Virtual Buzz does not serve espresso hot chocolate. Currently, it serves both espresso and hot chocolate separately but not together. The expresso sells for $1.75 per mug and costs $.50 to make. If bob were to make espresso hot chocolate, he would sell it for $2.50 but it would cost $1.40 per mug, respectively. Based on customer responses, Bob estimates that he would be cut in half Bob estimates that he could sell 500 mugs of the espresso hot chocolate to his product mix?
It appears that part of a sentence was left out of the description, but I think I can answer your question even without it. I suspect the missing information says that Bob will lose half of his Expresso business because customers will migrate to the new product.
The story on the new product is a question of margins. Expresso which sells for $1.75 with a cost of $.50 has a gross margin of $1.25. Expressed as a percentage, the margin is 71% (1.25 / 1.75). Following the same calculation, the new product has only a 44% gross margin.
If Bob would add 500 mugs of new product sales, business would be good, but if 250 mugs migrate from expresso to expresso chocolate, here are the calculations:
250 mugs of expresso chocolate at $2.50 x 44% = $275 of gross margin
Less: 250 mugs of expresso at $1.75 x 71% = $246 of gross margin
Bob would still be okay for an additional margin of $29, and he would have the additional new business of the other 250 mugs of expresso chocolate.
Yup, time for Bob to expand his product line.
