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You have started a business that sells a home gardening system that allows people to grow...

You have started a business that sells a home gardening system that allows people to grow vegetables on their kitchen countertop. You are considering two options for marketing your product. The first is to advertise on local TV. The second is to distribute flyers in the local community. The TV option, which costs $40,000 annually, will promote the product more effectively and create a demand for 950 units per year. The flyer advertisement option costs only $5,000 annually but will create a demand for only 270 units per year. The price per unit of the indoor gardening system is $105, and the variable cost is $65 per unit. Assume that the production capacity is not limited and that the marketing cost is the only fixed cost involved in your business. What are the break-even points for both marketing options? The break-even point for TV advertisement is enter a number of units for the break-even point for TV advertisement units. The break-even point for flyer option is enter a number of units for the break-even point for flyer option units. Which one should you choose? You should choose the

Solutions

Expert Solution

Selling price per unit of the indoor gardening system = $105

Variable cost per unit of the indoor gardening system = $65

Contribution per unit of the indoor gardening system = Selling price per unit of the indoor gardening system - Variable cost per unit of the indoor gardening system

= $105 - $65

= $40 per unit

.

Fixed Cost for:

Option-1:TV Advertisement = $40,000 annually

Option-2: Distribute Flyer = $5,000 annually

.

.

Break even point for TV Advertisement Option = Fixed Cost for TV Advertisement Option/Contribution per unit of the indoor gardening system

Break even point for TV Advertisement Option = 40,000/40

Break even point for TV Advertisement Option = 1,000 units

.

.

Break even point for Flyer Option = Fixed Cost for Flyer Option/Contribution per unit of the indoor gardening system

Break even point for Flyer Option = 5,000/40

Break even point for Flyer Option = 125 units

.

.

Calculation of Profit under the Two Marketing options:

Particulars TV Advertisement Distribute Flyers
No of Units that can be sold (i.e. Demand for the product) (1)                                950                            270
Contribution per unit of the indoor gardening system (2)                                   40                              40
Total Contribution from sale of indoor gardening system (3) = (1)*(2)                          38,000                      10,800
Less: Fixed Marketing Cost                          40,000                        5,000
Net Annual Profit:                          (2,000)                        5,800

.

We should choose Flyer option to market our product since it will give us an annual profit of $5,800.While TV Advertisement option will result in a loss of $2.000.

So , we should choose flyer Option to market our product - home gardening system.

jeff jeffy answered 1 month ago
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