At a retail selling price of $2.5, Pepsi will be able to cover 15% of the...

At a retail selling price of $2.5, Pepsi will be able to cover 15% of the approximately 1 billion units (20 oz. bottles) premium water market in US. If retailers charge a margin of 20% and if Pepsi’s unit variable cost in making and selling a bottle of LIFEWATR is $1, and Pepsi will incur a total fixed cost (in manufacturing, advertising, branding etc.) of $75 million, what is the profit that it can expect from the product? At $2, Pepsi will cover 20% of the premium water market in US. Do you think they should price the product at $2? Assume that there are no whole sellers between Pepsi and its retailers.

Expert Solution

Total Market	1,00,00,00,000
Selling Price P.U.	2.5	2.0
Market	15%	20%
Bottles	15,00,00,000	20,00,00,000
Revenue	37,50,00,000	40,00,00,000
VC	15,00,00,000	20,00,00,000
Fixed Cost	7,50,00,000	7,50,00,000
Retailer Margin	6,25,00,000	6,66,66,667
Profits	8,75,00,000	5,83,33,333

Retailer Margin P.U	(2.5/120)*20	(2/120)*20
	0.42	0.33

Retailer Margin Per Unit (P.U.), has been multiplied by Bottles to get total retailer margin.

As this can be seen profits are higher when product is priced at $2.5, therefore recommended to sell at 2.5.

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