Question

Problem 1: After a product recall triggered by salmonella contamination and repeated violation citations by the health department, Mc Burger Inc. is considering introduction of its first brand of soy-based gourmet burgers, Healthylicious-n-Safe. Each box of Healthylicious-n-Safe contains 8 burgers (similar to other meatless burger brands). An extensive marketing research undertaken by the firm indicated that there is a growing demand in the meatless burger market, with annual projected sales of 1,250,000 boxes (Note that this is the demand in the total meatless burger market and not the demand for the Healthylicious-n-Safe brand).

Mc Burger estimates that it will incur a fixed cost of $35,000/month. The variable cost of making one burger is estimated to be $0.875. Mc Burger plans to run a promotional campaign in the first 12 months of product introduction, which is estimated to cost a total of $275,000. Based on its marketing research Mc Burger expects an average customer to pay $9.00 for a box of Healthylicious-n-Safe.

Do you think Mc Burger should launch this new product? Is Mc Burger likely to break-even in 12 months? Is Mc Burger likely to break-even in 18 months?

Research undertaken by an independent marketing research firm indicates that the maximum price the market can bear is $7.75 for a box of Healthylicious-n-Safe. Should Mc Burger go ahead with the launch under this scenario? Will it be able to break-even in 12 months? Will it be able to break-even in 18 months?

Answer 1

Based on its marketing research Mc Burger expects an average customer to pay $9.00 for a box of Healthylicious-n-Safe.

Do you think Mc Burger should launch this new product?

Based on the cost estimates that are provided let us calculate the total cost involved in the production of MC burger:

Monthly projected cost of production: $35000

Cost of one burger production= $0.875

Cost of 12 months promotion: $ 275000

Average price MC Burger expects customers to pay: $9

Based on these assumptions let us calculate the total cost incurred by MC burger in the first year:

(35000 *12)+(275000)= $695000

The fixed cost per year is $ 695000 which if calculated to reach the break even in 12 months should be as follows:

695000/ 12= $ 57917 per month

So if the the sales revenues minus the production cost is:

57917/ 9 = 6435 burgers sales should be achieved per month amounting to in a year:

6435*12= 77220 burgers sold in a year out of 1250000 demand for burgers over all.

Hence the percentage market coverage required to reach breakeven in 12 months is:

(77220/1250000)*100 = 6.17%

So if the breakeven is to be reached in 12 months a market coverage of 6.17 % should be reached selling 77220 burgers.

Yes the product should be launched.

Yes MC Burger is likely to reach breakeven in 12 months and 18 months also.

Research undertaken by an independent marketing research firm indicates that the maximum price the market can bear is $7.75 for a box of Healthylicious-n-Safe.

Should Mc Burger go ahead with the launch under this scenario?

In case the customer can bear a price of $7.75 then:

57917/ 7.75= 7473 burgers should be sold each month.

Yes the break even can be reached in 12 & 18 months as the customer demand is 1250000 per year.