Corben Inc. has a successful brand with the name Crunz. The market size in which

Question

Corben Inc. has a successful brand with the name Crunz. The market size in which Crunz competes is $4 billion, and Crunz has generated sales of $400 million. It has a contribution margin of 30% and annual fixed costs of $20 million. Corben Inc. is thinking of introducing a new brand under the name of Zaturn. Zaturn will compete in the same market as Crunz. The annual fixed costs for this brand are expected to be $40 million.

If it is launched, Zaturn will capture 10% of the market. It has a contribution margin of 40%. Half of the sales of Zaturn will be cannibalized from the sales of Crunz. An alternative strategy for Corben Inc. is to cancel the introduction of Zaturn and instead to spend the $40 million (on an annual basis) to promote Crunz. This action is expected to increase the sales for Crunz by 50%. Both brands (Cruz and Zaturn) sell at the same price.

Where should the company spend the $40 million and why? Show all calculations!

Explanation / Answer

Answer:

Option 1: Introducing Zaturn

Zaturn will capture 10% of the market = 4000 million * 10% = 400 Million

So Additional Contribution = 400 Million *40% = 160 Million

Option 2: Increasing sale of Crunz

This action is expected to increase the sales for Crunz by 50% = 400 Million *50% =200 Million

So Additional Contribution = 200 Million *30% = 60 Million

Hence the Co. should spend in Option 1 that is Introduction of Zaturn.

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