Appleton Estate Distillery now sells three rums that have different levels of aging: the Signature which sells for $24/bottle with a variable cost of $5/bottle, the Appleton 21 priced at $136/bottle with a variable cost of $60, and the Joy Anniversary Blend priced at $238/bottle (variable cost of $90). The company predicts that it will sell about 220,000 bottles of Signature, 140,000 bottles of Appleton 21, and 80,000 bottles of the Joy Anniversary Blend next year.

The management team is considering the launch of a new 12-year-old blend called Reserve priced at $60/bottle with a variable cost of $18. They forecast selling 60,000 bottles in the first year. Forty percent of these sales are expected to be incremental demand, 30% is expected to come from cannibalizing Appleton 21, 27% will come from Signature, and the remaining 3% is expected to come from Joy Anniversary sales. If they launch the Reserve, they project a $20M opportunity cost (in present value) for having to pull the aging rum at the 12-year mark versus letting it age further. They will also incur $500,000 in advertising costs in the first year after launch.

Show calculations to answer the following:

a. Should Appleton Estate launch the Reserve? [10]

b. In year two, (without the Reserve) sales of Joy Anniversary are expected to increase by 5%, Appleton 21 by 10%, and Signature by 20%. The forecast is for 85,000 bottles of Reserve in year two, and the cannibalization rates are expected to be about the same. They expect that promotion will cost $600,000 in year two. Considering both years, should they still launch it?

Answer rating: 100% (QA)

a In the year 1 the company makes more profit without ... View the full answer