Question

General Mills just is undertaking an analysis on a new cereal. The firm realizes that if they come out with a new product it would affect sales of existing products? What is the best course of action for General Mills in this analysis?

A) Treat the reduction of sales from existing cereals as a sunk cost.
B) Account for the reduction of sales from existing cereals in the projection of cash flows on the new product.
C) Include the allocated costs of the new cereal in the sales of the pre-existing products.
D) Ignore the fact that sales of other products will be affected.

Answer 1

The best course of action for General Mills in this analysis would be to treat the reduction of sales from existing cereals as a sunk cost.

Step-by-step explanation:

The best course of action for General Mills in this analysis would be to treat the reduction of sales from existing cereals as a sunk cost. This means that General Mills should ignore the costs they have already incurred in the production and marketing of their existing cereals when analyzing the potential impact of the new cereal. By focusing on future projections and ignoring sunk costs, General Mills can make decisions based on the potential success of the new product rather than being influenced by past investments.