Jenna's Home Spa Sales Currently Sells 2,000 Class a Spas

question 116

Multiple Choice

Jenna's Home Spa Sales currently sells 2,000 Class A spas, 5,000 Class C spas, and 1,000 deluxe model spas each year. Jenna is considering adding a mid-class spa and expects that if she does she can sell 2,500 of them. However, if the new spa is added, Jenna expects that her Class A sales will decline to 1,700 units while the Class C sales decline to 4,500. The sales of the deluxe model will not be affected. Class A spas sell for an average of $75,000 each. Class C spas are priced at $25,000 and the deluxe model sells for $100,000 each. The new mid-range spa will sell for $50,000. What is the erosion cost?

• A) $35,000,000
• B) $90,000,000
• C) $125,000,000
• D) $205,000,000
• E) $240,000,000

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Definitions:

Doubtful Accounts

Accounts receivable that a company believes it may not be able to collect, often leading to the creation of an allowance for doubtful accounts.

Debits

An accounting entry that results in either an increase in assets or a decrease in liabilities on a company's balance sheet or in its income statement.

Credits

An accounting entry that either increases liabilities and equity or decreases assets, reflective of the dual-entry bookkeeping system.

Rental Receipts

Income received from renting out property or equipment.