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

Question

Corben Inc. has a successful brand with the name Crunz. The market size Crunz is competing 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. Creative Solutions 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 of this brand are expected to be $40 million dollars.

If it is launched, Zaturn will capture 10% of the market. It has contribution margin of 40%. Half of the sales of Crunz will be cannibalized from the sales of Zaturn. An alternative strategy fort Corben Inc. would be 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 of 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 calculation.

****Please show/explain work in a clear and concise manner. Thank You***

Explanation / Answer

Option 1: Launch of Zaturn

Zaturn sales = 10%*4000,000,000 = 400,000,000

Profits from sales of Zaturn = 4000,000,000*40%- Fixed costs

= 160m - 40 m = $120 million

Cruz sales = 200m* 30% - 20m

= $40 million

Total profitability = 120+40 = $160 million

Option 2

Sales of Crunz = 400m + 400m*50% = $600 million

Net profitability = 600m*30% - Fixed costs - Promotion costs

= 180m - 20m-40 m

= $120 m

The Company should opt for launching the brand Zaturn for a higher profit figure.

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