4. After spending S300,000 for research and development, chemists at Diversified

Question

4. After spending S300,000 for research and development, chemists at Diversified Citrus Industries have developed a new breakfast drink. The drink, called Zap, will provide the consumer with twice the amount of vitamin C currently available in breakfast drinks. Zap will be packaged in an 8-ounce can and will be introduced to the breakfast drink market, which is estimated to be equivalent to 21 million 8-ounce cans nationally, One major management concern is the lack of funds available for marketing. Accordingly., management has decided to use newspapers (rather than television) to promote Zap in the introductory year and distribute Zap in major metropolitan areas that account for 65 percent of U.S. breakfast drink volume. Newspaper advertising will carry a coupon that will entitle the consumer to receive S0.20 off the price of the first can purchased. The retailer will receive the regular margin and be reimbursed for redeemed coupons by Diversified Citrus Industries. Past experience indicates that for every five cans sold during the introductory year, one coupon will be returned. The cost of the newspaper advertising campaign (excluding coupon returns) will be $250,000. Other fixed overhead costs are expected to be $90,000 per year. Management has decided that the suggested retail price to the consumer for the 8-ounce can will be $0.50. The only unit variable costs for the product are $0.18 for materials and $0.06 for labor. The company intends to give retailers a margin of 20 percent off the suggested retail price and wholesalers a margin of 10 percent of the retailers' cost of the itenm a. At what price will Diversified Citrus Industries be selling its product to wholesalers? b. What is the contribution per unit for Zap? c. What is the break-even unit volume in the first vear? d. What is the first-year break-even share of market?

Explanation / Answer

a At what price will diversified Citrus Industries be sellings its product to wholesalers Retail price to consumer $0.50 Price to retailers $ 0.50 - $0.10 $0.40 (Margin @ 20%) $0.50*20% 0.1 Price to wholesalers $ 0.40 - $0.04 $0.36 (Margin @ 10%) ($0.40*10%) 0.04 b What is the contribution per unit for Zap Selling price per unit $0.36 Variable cost per unit Materials $0.18 Labor $0.06 Coupon ($0.20/5) $0.04 $0.28 Contribution per unit $0.08 c What is the Break even unit volume in the first year Break even unit volume = Fixed Expenses/Contribution per unit Advertising costs $250,000 Other fixed overhead costs $90,000 Total Fixed costs $340,000 Contribution per unit $0.08 Break even unit volume 4250000 d What is the first year break even share of market Break even share of market = Break even Volume/Served market Size U.S. Market Size $21,000,000 Served Market Size ($21000000*65%) $13,650,000 Break even unit volume 4250000 Break Even share of market 31.14%

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