M,M3. Should the Challenger deal be charged for the lost sales of bikes through the regular distribution channel (erosion or cannibalization cost)? If so, what is the relevant erosion cost?

Erosion can be defined as a negative impact on one or more of a firm's existing assets. Product cannibalization refers to the situation where a new product of a firm competes with its existing product (s) and reduces sales of it. The estimation of erosion or cannibalization costs is paramount in making intelligent business decisions about the proper amount of components to obtain commitments in any given period. This is particularly true when a large number of products are made from a large number of the same components. However, I do not think that the erosion costs should be considered when looking at the decision to produce the challenger bikes. It has been assumed in the case that the sales of Baldwin bikes will be negatively affected if the Challenger deal is accepted. However, there is no certainty that the Baldwin sales will be really affected, and if so, then how much. It will be hard to charge Hi-Valu for the erosion cost without having enough data for the estimation of lost sales. If the possibility of introducing the new product is foregone because of the cannibalization cost, a competitor can use the opportunity to fill the requirement of the new product and will also grind down the sales of the firm's existing products. If Baldwin turned down the deal with Hi-Valu, Hi-Valu may make the deal with a competitor of Baldwin. In that case, the sales of Baldwin will still be affected, but it will not be able to charge erosion cost to anyone. The projected 3% sales decrease is not enough to kill the project. On top, the bicycle business was