MAR 331
Cannibalization Problem
Martin Barrister, vice president of Marketing for Melrose Computer, Inc., must
decide whether to introduce a mid-priced version of the firm’s MC9000 professional
computer product line. The mid-priced version, the MC9000-X, would sell for $3,900,
with unit variable costs of $1,800.
Projections made by an independent marketing research firm indicate that the
MC9000-X would achieve a sales volume of 500,000 units next year, its first year of
commercialization. One-half of the first year’s volume would come from buyers
switching from the competition’s professional computers and from new market growth.
However, the consumer research study indicates that 30 percent of the MC9000-X sales
volume would come from Melrose’s higher-priced MC9000-Omega professional
computer, which sells for $5,900 (with unit variable costs of $2,200). The other 20
percent of the MC9000-X sales volume would come from the economy-priced MC9000Alpha professional computer, priced at $2,500 (with unit variable costs of $1,200).
Prior to any decision to proceed with the introduction of the new midsized model, the
MC9000-Omega unit volume was expected to be 400,000 units next year, and the
MC9000-Alpha was expected to achieve a 600,000 unit sales level.
The fixed costs of launching the midsized MC9000-X have been forecast to be $2 million
during the first year of commercialization.
Should Mr. Barrister add the MC9000-X model to the line of personal computers?
Explain why or why not.