Question

Assume that you are the V.P. of marketing for a company (manufacturer) that produces refrigerated prepared pasta dishes for sale to consumers through various retail channels. You are considering producing a new line of all natural one-serving pasta dishes.

This is a new product that will appeal to health-conscious consumers.

Top management is committed to invest $400,000 in equipment to start production. You ordered and paid $3,000 to a specialized marketing research company to assess a value that potential buyers will see in your product and their willingness to pay. Research findings suggest that consumers would only be willing to buy the pasta if the price is less than $6.00 per package.

You will be selling the pasta through specialty food brokers who will distribute to natural food stores who will sell to consumers. The natural food stores require a 30 percent retailer margin and the brokers require a 20 percent wholesaler margin. Treat retailer and wholesaler margins as markups on price (not as markups on cost).

In addition, you plan to run promotional campaign to introduce your product to

potential buyers. This will cost you $12,000 during the first four months. You do not plan to spend any money on promotion after the first four months as all potential buyers by that time will be aware of your product.

1. Assuming the natural food stores will sell the product for $5.99 per package, what price will the specialty food brokers charge the food stores for the product?
2. What price will the manufacturer charge the specialty food brokers?
3. If the manufacturer costs are $0.95 per package, what will the manufacturer’s contribution per unit be (or fixed cost contribution)?
4. How many all natural one-serving pasta dishes the manufacturer needs to sell during the first year to break even?

Answer 1

Answer :

A.

The natural food stores Margin 30% on sale price. ( Given ).

Purchase Price = Sale price - margin on sale price

$ 5.99 - ( $ 5.99 × 30% )

$ 5.99 - $ 1.797

$ 4.193.

Food Brokers charge $ 4.193 per package that will be purchase price for natural food stores.

B.

Taking reference of above answer food Brokers Charge $ 4.193 per package.

Selling price for food Brokers will be $ 4.193 per package.

Broker's margin is 20% on selling price ( given ).

Manufacturer price = broker's selling price - Margin on sale price.

$ 4.193 - ( $ 4.193 × 20% )

$ 4.193 - $ 0.838

$ 3.354

Manufacturer will charge $ 3.354 per package from food Brokers.

C.

Contribution Margin = Sale price - variable costs.

Sales price = $ 3.554 per package. ( refer answer b Price charge by manufacturer will be the selling price )

Variable costs = $ 0.95 per package.

Contribution Margin = Sales price - variable costs

$ 3.554 per package - $ 0.95 per package

$ 2.604 per package.

Contribution Margin will be $ 2.604 per unit.

D.

Assumption : in absence of information about depreciation entire equipment cost is considered for fixed costs along with marking research and promotion expenses.

Breakeven Points ( units ) = Fixed Costs / Contribution margin per units

Fixed costs for 1st year = Equipment Costs + Marketing Research + Promotion Expenses.

$ 400,000 + $ 3,000 + $ 12,000.

$ 415,000.

Contribution Margin per units = $ 2.604 per unit ( refer answer C ).

Breakeven Point ( units ) = Fixed Costs / contribution Margin per units

$ 415,000 /:$ 2.604

159,370 units.

Manufacturer has to sell 159,370 units to reach at Breakeven for first year.