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Investment Decisions

Pet Store - Part 1
A local pet store which has concentrated on selling puppies, is considering adding a line of pet food. A contractor estimates that is will cost $10,000 to convert some storage space into a retail area for the food. The store will purchase the specialty food for $15 and sell it for $30. Marketing research indicates that the store will sell 900 bags. Should the store add the pet food to its products and why?

Pet Store - Part 2
Assume that the store decided to add the pet food line. Two months after it began selling the food, its pet food sales declined dramatically because a competitor across the street started selling the identical food for $22 per bag. Should the store match the price offered by the competitor? Why?

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Solution Preview

Part 1
We calculate the total contribution margin from the sale of bags and compare to the cost. The contribution margin is (30-15) = $15 per unit. Number of bags sold are 900. Total contribution ...

Solution Summary

The solution explains how to determine if a new line of pet food should be added and the pricing.