Starbucks launches a social media campaign to promote its new (mythical) line of fresh-baked pastries. Starbucks...

Starbucks launches a social media campaign to promote its new (mythical) line of fresh-baked pastries. Starbucks expects the campaign to generate 4,750,000 units in incremental sales in its first year at a campaign cost of $4 million. Average sales price per fresh-baked pastry is $2.85 and the contribution margin % for the fresh-baked pastries is 40%. a. Calculate the amount of Contribution the social media campaign for the fresh-baked pastry launch is expected to generate. b. Calculate the Return on Marketing Investment % (ROMI%) for the social media campaign /fresh-baked pastry launch. c. Starbuck's corporate policy is to only invest in marketing initiatives that have a 20% ROMI % or higher. Based on this policy, will Starbucks invest in the social media campaign for the fresh pastries launch? d. Recalculate the expected Contribution you determined in part a. assuming that the campaign/launch will cannibalize the sale of 1,250,000 units of pastries currently being sold at a price of $3.15 and a contribution margin of 35% and lower marketing costs associated with these cannibalized pastry sales by $275,000

Expert Solution

a.

Sales unit	4,750,000
Sales price (per unit)	$ 2.85
Sales Revenue	$ 13,537,500
(Variable Costs)	$ 8,122,500
Contribution Margin	$ 5,415,000

b.

Return on Marketing Investment = (Return - Investment) / Investment

= ($5,415,000 - $4,000,000) / $4,000,000

= 0.35375 (35%)

c. Starbucks will invest in the social media campaign for the fresh pastries launch as the ROMI is 35% and that is more than 20% policy requirment.

d.

Sales unit	(1,250,000)
Sales price (per unit)	$ 3.150
Loss of Sales Revenue	$ (3,937,500)
(Variable Costs)	$ (2,559,375)
Contribution Margin	$ (1,378,125)
Reduction in Marketing expense	$ 275,000
Net Effect	$ (1,103,125)

ekkarill92 answered 1 year ago

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